How Referral Marketing Reduces Customer Acquisition Costs (CAC)

referral marketing

Too often, CEOs and business owners overlook an obvious opportunity to grow their business.  For a company that has turned media buying over to an agency, it is very easy to ignore the referral marketing channel.  After all, the agency is not going to benefit from recommending referrals. They want a higher media spend.  But referral marketing can have an invaluable effect on a company’s top and bottom line. It is an essential component of the marketing mix.

Referral Marketing Requires Minimal Change in Budget

Many business leaders think marketing and spending go hand-in-hand. To reduce customer acquisition costs, marketers often focus on changing the marketing spend to generate more leads. Referrals generate leads with minimal or no increase in budget. Essentially, making each marketing dollar work harder and smarter. While financial incentives can increase referrals, process changes are the key to a healthy referral program.

Additionally, referral marketing is beneficial because it allows businesses to reduce customer acquisition costs. Consider the customer who tells a friend about a wonderful dinner. This customer was delighted with an experience they had over the weekend at a new restaurant. The friend and their partner try the new restaurant the following weekend. Regardless of what the restaurant paid to get the first customer in the door, their customer acquisition costs are reduced. If the cost was $100 for one customer, it is now $50 for two. They received two customers for the price of one!

Delightful Customer Experiences Deliver

Research has shown that customers are far more likely to refer a company if they have had a good experience. This is true even in situations where the company delivers an average product or service. Before launching a formal referral program, ensure your product, marketing and customer support teams are working collaboratively. They should jointly deliver an experience that exceeds expectations. People love to tell others about a delightful service experience they have had.

Customers and Employees Are Your Best Advocates

Referrals can come from multiple sources, including customers and employees. Current customers are a great source for referrals. They can give testimony about your product that even your best sales rep cannot top. The best trained sales reps will advise prospective buyers on all the features of the product. They can articulate the benefits whether they have used it or not.  But a customer is more likely to be seen as giving a more fair and impartial review of your product.  When a customer recommends your product, they become your best advocate. Thus, it is important to give customers who have had a stellar experience an opportunity to review your product.

According to a study published on eMarketer, leads referred by customers and employees generate the best referrals. They are more than twice as likely to convert than leads from any other lead source. When an employee produces a “referred lead” to an internal recruiter, that referral is more likely to be interviewed and hired. If wait staff recommends a particular dish, the dish is sold more often. The same is true for nearly every product on the market.

When an insider with first-hand experience sends a lead to a company, that lead is more likely to engage. Ultimately, they are more likely buy the product. Some employees might refer business on their own. To maximize referrals, set up a formal process for those who frequently connect with customers. Customer care specialists who successfully resolve customer concerns should be trained to ask for the referral. Consider doing the same for other employees with direct customer access.

Develop Processes that Encourages Referrals

Most businesses that deliver a good experience will have some level of ambient referrals. But why leave these opportunities to chance? Create a proactive referral marketing program. Set up processes that make it easy for customers to refer friends, family and acquaintances. Give them opportunities to share their experience with others. Ensure employees are encourged to and recognized for bringing in new referrals.

The costs to launch a referral campaign are low and the potential pay-off is high. Develop your referral marketing plan today.