Let's Get Technical: What is Referral Marketing?

We earlier explored the idea of marketing, and concluded that it was fundamentally about communicating value. Marketing can happen even if you don't make any conscious efforts to aid it. If you create something valuable and put it out there, it's likely that people will start talking about it. But they might not, either.

The job of the marketer is to deliberately influence the process, making sure that everybody hears about how valuable some product is.

Referral marketing is when you get your customers to tell their friends about you.

Like marketing in general, referral marketing is an organic process. Like marketing, it happens whether marketers get deliberately involved or not. We all already tell our friends about our experiences, we're wired to. (We don't do this nearly as much as we should, though. We explore this idea further here.)

The role of the referral marketer is to be deliberate about the process, making sure that people tell their friends about the awesome products and services they've purchased.

This involves the implementation of incentives and tracking, and lots of careful study. The challenge is to ensure that these interactions are timely, useful and relevant. Consumers trust their friends more than retailers, but nobody stays friends for long with annoying people who constantly bombard everybody with irrelevant, annoying information.

In a broad sense, anything that encourages customers to refer friends to a retailer is referral marketing.

This went way back to pre-industrial days, when our ancestors probably earned goodwill with merchants by sending their friends to them.

It's very easy to imagine Oglaf saying to Daelus, "Ay, Daelus, your chainmail is bespoiled. Go to Balthazar the Blacksmith, and tell him I sent ye." The blacksmith says "Oh, you're a friend of Oglaf? Fantastic! Here's a discount!" The next time Oglaf drops by the smith's, Balthazar says "Business is booming thanks to you, Oglaf!" and gives him a sweet new axe, on the house. Everybody's better off for it.

This is easy to imagine, because we do the same ourselves. The florist gives us a prettier bouquet for telling our friends about him. The baker delights you with a surprise cupcake the next time you drop by, because you convinced your brother to bake his wedding cake there. I don't have actually have to explain to you why this is the way it is. It's very natural human behavior.

Humans understand referral marketing very intuitively... at the interpersonal level. We're wired to! It "just works." It must have given our ancestors a competitive advantage over any non-social, non-reciprocal people around.

Why should you bother with referral marketing? You wouldn't even think to ask that question if you were running a small brick-and-mortar store on your own: You'd just do it, or lose out to others that did. Nobody had to explain to Balthazar the Blacksmith why he should reward his customers for bringing friends in- the value is self-evident. You make your customers happy, you make their friends happy, you get more business. Win-Win-Win.

So why don't all businesses do referral marketing?

Maintaining the warmth of human interaction at industrial and post-industrial scales is incredibly challenging. It comes naturally only for very-small operations.  Balthazar likely kept track of his customer referrals informally in his heads, or through simple bookkeeping if business was good. He would have had to recognize customers' faces. If he were running a large organization or a popular ecommerce store today, though, he'd have to worry about fraud. How do you tell if someone is real? How do you keep track of everything?

As a store gets larger and more popular, running an informal referral program becomes increasingly impossible, and the cost of painstakingly keeping track of referral figures (who referred who, how much did we reward them) increases. This can distract from a business's core value proposition. You don't want to be spending time micromanaging your customer referral program, you want to be spending your time building great products.

If you've got a massive brand making big profits, you can afford to hire people to manage your referral marketing for you. This can be pretty costly- it require knowledge, experience and data.

Alternatively, you could use third-party solutions.

Why use third-party solutions for referral marketing?

InternetRetailing.net recently had a webinar to discuss the risks and rewards of SaaS in retail. Here's what a successful retailer, David Kohn of SnowAndRock.com had to say about ecommerce and third-party solutions:

“It’s an incredibly fast-moving market where technology is becoming increasingly specialized and unless you are really a significant player, and we are very much a medium-sized retailer, it’s impossible to keep on top of it all,” said Kohn. There are certain areas where you have to use third parties. The experience is also becoming increasingly componentised and there are these point solutions, such as search, merchandise where your core solution may not be adequate.”

SaaS also reduces the need for in-house resources, said Kohn. He heads a team of two running three websites, and SaaS allows them to focus on their core strengths and needs without needing a larger team to develop and maintain systems. “Because it’s not a one-off license sale and they want to retain the business there’s an ongoing focus, which means they always care. Sometimes once you’ve got a licence they lose interest.” Upgrades are also easier, he said.

That might sound a little technical and confusing, but all he's essentially saying that third-party solutions empower retailers to punch above their weight.

In summary:

1. Referral marketing is when you deliberately influence and incentivize word-of-mouth marketing
2. Everybody intuitively understands the power of word-of-mouth and customer referrals, but it's difficult and costly to manage the process
3. Third-party solutions allow retailers to get the benefits of customer referral programs (and a variety of other things, like social reviews) without all the hassle and costs of implementation, tracking, reward payment, etc.

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We'll expand more about the specifics of referral programs in ecommerce, and get into the nitty gritty in later posts! In the meantime, here's some further reading:

What's The Difference Between Referral Marketing and Affiliate Marketing?

Do Referral Programs bring you better customers?

Who should you reward in your referral programs?

Examples of referral programs