Over the past decade or so, some businesses have achieved tremendous growth through the use of a technique known as referral marketing. According to Sam Edwards (2015) writing for Entrepreneur, Airbnb and Dropbox were two such companies.
Referral marketing is a method of promoting products or services to new customers through referrals, usually word of mouth. Such referrals often happen spontaneously but businesses can influence this through appropriate strategies.
Companies such as Airbnb and Dropbox have grown, to a large degree, through successful referral marketing. The way that it worked at Airbnb was very simple. The company sent an email around to current participants. Within this it offered a $25 travel credit when new members took a first trip and then another $25 the first time they hosted a guest.
The programme that Airbnb undertook for referrals made total sense. Airbnb did not pay for referrals unless a purchase was actually made. This meant that money was not thrown away on referrals that would not be cost effective. The approach is still being used now to continue the company growing. In fact, it is argued that it is this programme that has aided Airbnb to continue to achieve amazing growth. The figures speak for themselves, and the number of users of Airbnb has doubled more or less each year since 2012.
Dropbox has also achieved remarkable growth by using a referral programme. In the case of Dropbox it is argued that this was done “out of necessity rather than desire.” The company had been using approaches that were not working. It found pay per click advertisements to not be cost effective, and that it was too hard to compete in the search engines with long tail search terms.
Instead it turned to referral programmes to gain customers. Dropbox undertook a referral programme which sought to benefit both the person doing the referring and the person being referred, providing incentives to both to use Dropbox. The referred member got benefits and the person that did the referring was given additional storage space. This is reported to have increased sign-ups by 60%, and it led to an outstanding 2.8 million direct referral invites occurring within an 18 month time frame. At the current time 35% of sign-ups are still achieved via the referral programme.
From reviewing the case studies of Dropbox and Airbnb it is possible to see what goes into a highly successful referral programme, and organisations should seek to emulate the factors leading to success. For example, one of the major winners in the Dropbox programme was creating benefits for both the referrer and the person being referred. When this is not done there is limited uptake because one side has no real incentive to do what it is hoped they will. Meanwhile two-sided referral helps to reduce risk for new customers while encouraging current customers to do the referring. It also has to be worthwhile for the referrer and the person being referred to. If the rewards of the referral programme are not right then either the referrer or the person being referred to will not be motivated to get involved and the programme will fail. As can be seen in the case of Airbnb, the reward was significant, making it a no-brainer for customers to come on board.
Of course, as with any marketing activity it is essential to target the right sector of the market. Focusing on the wrong segment will not lead to success with a referral programme.
It is recommended that referral programmes target the most active customers because these are the people that are most likely to offer positive feedback to friends, encouraging them to take part. This helps to further promote your referral programme. There is no point at all in just sending the referral details to everyone in the database. Finally, it is essential that the referral programme is easy to understand. If it cannot be explained simply then customers will lose interest. Try to reduce it to a few simple steps that can be taken to get the reward. This will encourage a higher level of participation than an essay on how to get involved.
Paula Newton is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Paula’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Paula has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Paula has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.
