Referral Marketing Strategy: Why it Beats Traditional Advertising Every Single Time
In this blog, we will witness the ultimate throwdown between referral marketing and traditional advertising. There can only be one winner; who will it be?
Are your sales starting to look drier than a baking hot desert? Is traffic so low that your website has become a digital ghost town? Well, we hate to break it to you, but your marketing strategy could be to blame.
Hey, there's no need to get defensive; we are just telling it like it is. And let’s be clear: you are not alone in facing this issue. In fact, a whopping 40% of marketers believe that their marketing strategy isn't hitting the mark. Yikes.
We are here to champion referral programs as the answer to your business woes. This incredible strategy transforms loyal customers into marketing machines hellbent on attracting others to your brand.
In this blog, we will look at how referral marketing works and examine the numerous benefits that leave traditional advertising in the dust. So, come with us to find out why huge e-commerce brands such as Dropbox, Amazon, and PayPal are recommending referral programs to all their business pals.
What is traditional advertising and referral marketing?
Before we discuss the advantages of referral marketing compared to traditional advertising, it is crucial to start by understanding the definitions of these two techniques.
Traditional advertising
The world has changed a lot since the digital revolution. Landline phones have morphed into small, portable supercomputers. Sales of newspapers have declined as online news sources have taken over. Physical maps have been reduced to the helpful voice of a woman coming from a car console.
And while it is true that video killed the radio star, it was most definitely streaming that murdered the home video market.
Traditional advertising techniques are strategies used before the digital age took over the business world and thus are often viewed as remnants of a bygone era.
This old-school approach includes the following types of marketing:
- Television commercials
- Billboards
- Printed advertisements
- Brochures
- Direct mail
- Trade shows and exhibitions
- Radio advertisements
Referral marketing
We have all been there, unwittingly caught in the crosshairs of a referral marketing campaign. Just the other day, we decided to give the new local takeaway place a shot, all because a friend would not stop raving about it and insisting we had to try it out.
As we went to pick up our order, we were in for a surprise. Our friend was loading up his car with an endless supply of Chinese dishes, courtesy of the numerous referrals he had made for the business.
A referral marketing program is a remarkable customer acquisition strategy that relies on satisfied customers referring and recommending products, services, or brands to others within their social circles.
There are different types of referral programs. Check out the table below for an overview of some of the most valuable ones.
Hold on a moment, Mr. Businessman. Why exactly should we become your walking, talking billboard?
The referral process is often a win-win situation for both the customer base and merchants. Brands rake in new customers and increase brand awareness, while consumers are showered with a multitude of rewards for spreading the word about their favorite products.
Here are some examples of the many different types of referral rewards available for successful brand advocates:
- Free products
- Exclusive competitions and giveaways
- Coupons and discounts
- Cash rewards
- Gift cards
- Upgrades
- Exclusive access
- Loyalty points
But how do brands monitor which affiliates are generating certain conversions? After all, we wouldn't want to share those precious rewards with any sneaky hobbits- err, I mean marketers.
Okay, it is time to chill out before someone sends you toppling into the fiery pits of Mount Doom. There is no need to become too possessive over your precious discount because most customer referral programs hand out referral links to their affiliates.
Referral links contain tracking codes that enable businesses to monitor and attribute referrals to an exact source. When someone clicks on a link and takes a desired action, the tracking system credits it to the affiliate who shared the link.
Example: Dropbox
If you are searching for the perfect example of referral marketing, then look no further than the cloud-sharing and storage platform Dropbox. Sit down and take some notes as we delve into this referral masterclass that should act as a fantastic template for your own program.
This remarkable service offered customers the desirable incentive of more space for performing certain actions, including:
- 50GB for upgrading their account
- 16GB for referring a friend
- 125MB for connecting your Facebook account
- 125MB for connecting your X account, formerly known as Twitter
Furthermore, new customers were rewarded with extra storage for accepting the referral invite.
The referral process was made to be incredibly intuitive and simple, allowing consumers to click the ‘refer a friend’ button and send an email to a referee with ease.
Now, you most likely want to know if this approach was successful. Well, just a little bit.
Take a look at the table below that shows the growth in Dropbox users since the implementation of their referral program.
Yeah, take that in for a moment. That is an incredible 3900% growth in the space of 15 months. And Dropbox had their ‘get more space’ campaign to thank for it, as 35% of daily sign-ups were indeed referrals.
Referral marketing vs. traditional advertising
Get ready for the fight of the century. In the red corner, we have referral marketing. And in the blue, there is traditional advertising. Who will win in this epic showdown?
We are going to let these two marketing titans go head-to-head in four rounds to determine the ultimate marketing strategy once and for all.
Round one: Credibility
We have all heard of that much-touted Nielsen statistic that states that 92% of consumers trust word-of-mouth referrals from friends and family members above other types of advertising. But studies have also revealed that 63% of customers have a lot of faith in influencer and affiliate recommendations, too.
Wow, that is a staggering amount of trust we put into word-of-mouth referrals. While I may not have enough faith in an influencer to perform open-heart surgery on me anytime soon, I certainly would trust their recommendation when it comes to choosing my next brand of cologne.
But why is this level of trust important? Well, this trust factor has an incredible positive influence on a consumer’s purchasing decisions.
Think about it: would you rather buy your groceries from a shady man in a trench coat or a smiling cashier at your local supermarket? Sorry, Trench Coat Trevor, but we are trusting Walmart this time with our fruit and veg.
Don’t believe us about the power of trust, check out these game-changing statistics:
- 67% of customers state that they must trust a brand before they commit to any purchase.
- A recent study showed that 71% of consumers would be willing to purchase more with a trusted brand.
- It has been shown that 46% of consumers will pay more for products from brands they can trust.
But why do we trust word-of-mouth marketing so much?
One of the most significant strengths of referral marketing lies in the connections that referrers build within their network. Affiliates often maintain genuine and meaningful relationships with the individuals within their sphere of influence via engagement. This perceived personal connection results in a higher level of trust in recommendations.
It is also important to note that an affiliate's business model revolves around trust. When an individual chooses to promote a brand, they are essentially putting their reputation at stake.
If an influencer endorses a poor or unreliable product, it can result in a substantial erosion of customer loyalty, leading to a drastic decline in sales and potential business opportunities. This means that consumers can rest assured that influencers are unlikely to back a lacklustre product due to the associated risks.
On the other side of the marketing pond, 70% of consumers are becoming increasingly sceptical of traditional advertising. But why? Here are four reasons why traditional marketing is starting to seem fishy to your target audience:
- Bias: As consumers, we know that the ultimate goal of any marketing effort is to get us to open our wallets and make a purchase. The statistics, information, graphics, and audio presented in advertisements are all carefully selected to sell us a dream rather than the truth. It is highly unlikely that a brand will openly share information that clashes with this idealized image of a product.
- Information overload: In the digital age, it can often seem that we are faced with a constant stream of adverts vying for our attention. In fact, recent figures suggest that the average consumer is plagued with between 4,000 to 10,000 ads every single day.
This overwhelming volume can lead to ad fatigue, causing individuals to tune out or actively ignore ads.
- Intrusiveness: We have all been there– merrily browsing a website, only to be suddenly interrupted by a persistent pop-up ad that just won't go away. Many different types of intrusive advertising are determined to disrupt your day, including auto-play videos, in-app adverts, telemarketing calls, and social media feed ads. This is becoming a more common issue, with 71% of consumers claiming that advertisements have become more invasive compared to three years ago.
- Decline in credibility: Look, let’s be honest here: traditional advertising does not exactly have a squeaky-clean record. There have been countless incidents where brands have been caught fabricating information or making misleading claims to consumers. Take, for instance, L'Oréal, which frequently advertised products as 'clinically proven' to 'boost genes' and make skin look 'visibly younger' without a shred of scientific research to support these claims.
Round two: Cost
Money makes the world go round, but a lack of it can cause your business venture to grind to a sudden halt. It is estimated that 38% of small businesses and startups fail due to running out of cash.
Marketing can be a money pit that drastically drains the financial resources of even the most affluent brand. In fact, reports suggest that, on average, marketing costs represent 8.7% of overall company revenue and 13.6% of the total budget.
Alarmingly, 47% of businesses claim their marketing budget is expected to rise even more in 2023. But why are these budgets so astronomical?
We have scoured the web for the average cost of running some of the most common advertising materials. The shocking results can be viewed in the table below.
Who would have thought it? It turns out this marketing malarkey is rather expensive. Better start selling your cherished Beanie Baby collection to cover those costs.
Hold on one second; do not fret because Mr. Snuggles is not going anywhere. Thankfully, a solid referral marketing strategy can drastically cut down advertising costs. It is believed these programs can reduce customer acquisition costs by an incredible 25%.
Now, we will not sugarcoat things and act like referral marketing costs nothing whatsoever. That would be an absolute lie, and that is not how we roll here at GrowthPanels. So, here is a breakdown of the costs to kickstart a referral program:
1. Affiliate network
These remarkable SaaS marketing tools act as a middleman connecting affiliates with merchants.
To register your program, you will often need to pay a one-time fee and then fork out monthly charges to keep it running. It is important to note that these fees can drastically vary between different referral marketing software.
As an example, ShareASale has a $650 sign-up fee and an additional monthly transaction fee of 20% of the commission amount.
2. Commissions
The biggest expense of this type of marketing plan is providing high-quality incentives for your affiliates.
This reward commonly comes in the form of a commission, which is typically between 5%-30% of a sale.
For instance, if there are 50 new orders with an average value of $60, the affiliate revenue would be $3,000. In this case, an influencer with a 10% commission rate would receive $300.
However, it is essential to remember that commissions are completely performance-based, only rewarding actual results. In other words, if there are no sales, businesses won't have to part with their hard-earned cash.
3. Affiliate manager
Once you have a successful referral program brimming with subscribers, it may be time to start looking for an affiliate manager who can effectively oversee and manage it.
An affiliate manager is responsible for hunting down the best affiliates around and nurturing solid relationships with them. They also monitor performance using numerous metrics and use this data to further optimize campaigns and identify growth opportunities.
How much is this invaluable individual going to cost you? Current estimates from Salary.com suggest the average hourly wage of an affiliate manager is $33, but can vary between $28-$39.
4. Marketing materials
When starting your journey, it is crucial to have some form of marketing to attract new leads to your affiliate program. These are the marketing materials and resources needed to transform happy customers into a marketing army:
- Customer support: You will need an excellent customer support team to answer any queries, complaints, or issues for new affiliates.
- Landing page: It is important to have a high-quality landing page to attract new affiliates and allow them to register.
- Emails: Use email for affiliate outreach and to provide your existing marketers with essential information.
- Graphics: Creating branded graphics for affiliates to use throughout their marketing platforms provides another layer of brand awareness.
- Case studies: It is crucial to share success stories to entice new marketers and motivate other affiliates to work even harder.
The good news is that if you already have a marketing team making your business a roaring success, then all of these duties should be included within their job description. Otherwise, you should expect to pay between $30-$40 for the production and implementation of these marketing materials.
While there are evident costs for referral marketing, it remains undeniable that it is one of the most cost-effective advertising strategies around. It leverages your existing customer base as brand advocates to attract new leads to your business with minimal financial strain.
Round three: Customer retention rate
Sometimes, it can feel like your business has a leak. Customers are dripping out of your business at an alarming rate, but you can’t spot any cracks. Well, cancel that plumber because we are about to make those retention rates watertight once and for all.
But before we make a splash with our epic solution, let’s briefly chat about retention rate.
The retention rate is a metric that measures the percentage of customers who continue to use a product or service over a specific period. This makes it the perfect metric to measure customer loyalty and satisfaction.
The formula for calculating the retention rate can be seen in the image below:
It is important to note that the retention rate varies between sectors, but we have created the table below to show the average percentage for each industry.
Why is retaining existing customers so important? Can't we simply focus on acquiring new ones? Think again, pal. Check out these statistics that illustrate the importance of customer retention.
- It has been shown that acquiring new customers can be five times more expensive than retaining existing ones.
- Businesses can enjoy increased profits of 25%-95% by just increasing customer retention rates by 5%.
- It is believed that existing customers spend 67% more than new customers, providing a much higher lifetime value.
- A brand has a 60%-70% chance of selling to an existing customer, while this figure is only 5%-20% with a new customer.
It would seem that retention is unquestionably an essential element of any successful business plan. So, how exactly do we keep our customers from jumping ship into the hands of our competitors?
Research has revealed that digital marketing boasts a 40% higher retention rate compared to traditional advertising. Furthermore, it has been shown that referred customers stick around a lot longer, increasing customer retention by a whopping 37%.
So, let me get this straight: by simply switching to referral marketing, a brand can keep loyal customers for longer?
That is correct. It may sound absurd, but there are some distinct reasons for this level of devotion, including:
- Engagement: When customers are encouraged to refer friends and family to your business, they become more engaged with your brand. They have a vested interest in your success and are more likely to remain loyal.
- Social proof: Referrals from friends, family, and influencers carry a high level of trust. Consumers are more likely to stick with a product if someone they know and trust is also using it.
- Incentives: Most referral programs offer incentives not only to the referrer but also to the referee. This can encourage both parties to continue to engage with your business way past the first purchase.
- Targeted acquisition: Referrals tend to attract customers who are more likely to have a genuine interest in your products or services. This targeted acquisition can result in higher customer retention rates because these customers are a better fit for your business.
- Community building: Referral programs can foster a sense of community among your customers. People like to share positive experiences with others, and this sense of belonging can enhance customer retention.
Round four: Conversion rates
Well, here we are: the final round. It's time for our competitors to dip their toes in the ring one last time. But what will they be fighting over? It is time to bring out the big guns and find out who is the champion of conversions.
Conversions are a brand’s bread and butter. These are the desired actions that we want consumers to make. Without them, we truly would be nothing.
There are many different types of available conversions for consumers to undertake. Below is a table that shows some of the most common conversions.
It is estimated that referral marketing generates three to five times more conversions than any other marketing channel. In fact, 71% of B2B businesses state they experience higher conversion rates due to referred customers.
A majority of marketers (60%) claim that referral marketing generates a high volume of leads in comparison to other marketing channels. It is also believed that these referred leads are of considerable high quality, as they convert into customers 13% of the time.
The main conversion metric to monitor in this type of marketing is the referral rate. This figure indicates what percentage of your sales are from referred purchases.
The formula below will help you accurately calculate the referral rate.
It is estimated that, on average, the referral rate is approximately 2.35%. This means that for every 100 customers, at least two are sourced from this type of marketing.
However, it is important to note that this figure does differ between sectors, as seen in the below table.
And the winner is…
Ding, ding, ding, you are out of there. Sorry, traditional advertising, you fought your corner well. But there can only be one marketing champion here, and that is undeniably referral marketing.
Now, for those wanting to jump in the ring and start swinging those high-flying referral marketing punches, then look no further than GrowthPanels.
This remarkable automation tool allows users to easily and effectively create a showstopping affiliate program that rewards loyal customers for promoting your brand. We are so confident in our ability to deliver we guarantee you a $5,000 return boost without having to pay a single penny.
So, what are you waiting for? With GrowthPanels at your side, there is no chance you will lose this fight.
