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Lesson 1.

What is a company referral program and how does it work

This lesson will help you to know:

  • What is referral marketing?
  • What is a referral program?
  • How does a referral program work?
  • Uber referral campaign case

What is referral marketing?

It started a long time ago, on a sunny day, in Greece (probably). Somebody had a luminous business idea and they wanted to market it. There were no billboards or TV yet. So they’ve just asked a person they knew to tell others about their product. And it worked.

This is the essence of referral marketing, also known as the “word of mouth” principle. It is older than you can imagine, and a way more effective than you can imagine. In fact, so effective that Tesla, Uber, Airbnb, Google and PayPal are using it.

The study by the Wharton School of Business shows that “referred” new customers are about 20% more likely to be loyal to a company in comparison with non-referred customers.

What is a referral program?

Since marketers knew referrals work so well, they’ve done their best to create an automated tool to stimulate the “word of mouth”. Ta-da! So were the referral programs created.

A referral program (also: referral campaign) — a fully-automated marketing engine encouraging existing customers to promote services to potential new clients.

Simply said, your clients become referral holders: they recommend your services to people they know, and those can recommend it further.

How does a referral program work?

An average campaign begins with issuing initial coupons. This is done automatically via special referral tools. The initial coupons are given to a group of customers. Every coupon has a unique code. People with initial coupons invite other people to enjoy the services.

The practice shows, an invitation is not always enough to stimulate people to try something new. This is why referral programs feature certain rewards for every shared/used recommendation.

There are three types of rewards:

  • Person gets a coupon (giving a free trip or a discount) when invited. After this person took the first ride, the person who gave the recommendation gets a coupon, too.
  • Person gets a coupon when invited. The person who gave the recommendation doesn’t get any reward.
  • The person invited doesn’t get any reward. The person who gave the recommendation gets a coupon after the invited person takes the first ride.

The very first option in this list is the most used model of a referral campaign for a booking service.

Uber referral campaign case

Turns out, referrals work perfectly to market booking businesses, and taxi businesses in particular. The secret is, booking services make our lives better and easier, and this ease is what we love to share with our friends.

Uber was one of the first booking services to make a smart use of it. They gave a personalized referral code to each new user at the point of the account activation. Every time somebody created a new account redeeming such referral code, both parties were granted an Uber trip, for free.

Next to that, Uber launched a referral campaign attracting new drivers. Signing up for an Uber driver-account, one got credits for the first ride and a code. Referring reliable drivers to Uber with this code gave both parties the referral reward. Drivers were also given an opportunity to refer passengers. And vice versa. This made everything function like a perfect network of people helping each other.

In 2012, Uber was an American company on a highly-competitive market. Using this scheme, Uber marketed itself as a unique service in 50+ countries within just 3 years.

What’s so great about the referral model of Uber?

  • Reward for both referee and referral. This makes the direct value of the campaign to all the people involved.
  • Generosity. All the referral codes generated by Uber gave customers a possibility to get a reward more than once. People tend to feel or rationally notice such details when evaluating your business. And guess what? Generosity pays back in customer value.
  • Addressing two target audiences at once. It’s not that Uber only wanted to attract new passengers. They’ve also thought of the drivers: it was important to attract them and to make sure they are loyal.

Uber did not just come with a brilliant referral program model out of the blue. They’ve done serious research on how to maximize the utility of this marketing tool. And that’s exactly what we’re going to talk over in our next lesson.

Next lesson:

Maximizing your referral programs’ profitability

  • Defining the objectives of a referral campaign