The Rewards of Generosity


With referral marketing, as in life, the generous are rewarded. It's not that you need to give away all of your profits to incentivise your customers to refer you, but you do need to make it feel like you're giving them something of value in return for referring you. If it just feels like another sales push, referral is unlikely to work.

The most obvious phrase for making an offer feel less generous is "when you spend over...". If you offer a referring customer $20 off their next purchase, that feels pretty generous. If you offer $20 off if they spend over $100 then it feels like you're trying to sell to them and to convince them to spend more. The way your customers perceive the offer will be very different.

As a result of this difference we've seen some offers perform 3x better when a spend constraint has been removed. What's more, we don't usually see the average order value decrease even though there's no spend constraint. More ofte than not it ends up being win win.

So, why don't all businesses jump at this immediately? Because it has some risk. If you sell products at all price points then customers could use that voucher for goods up to that amount and you could lose money. Let's take an example. An online business operates on a 30% gross margin and has an average order value of £80. If they offer a referral voucher for £20 and a referrer uses it to buy an item of £20, that would leave the online business losing £14 each time a referral was made. If you've also offered the referred friend a discount then suddenly the cost per acquisition for the new customer might look unattractive. And if all referring ustomers followed this behaviour did that then the referral channel looks like an easy way to spend too much on acquisition.

However, the reality rarely works out like that. If the average order value holds up then the online business is actually making incremental profit on the referrer being enticed back in to spend their voucher. The cost of acquistion for the friend is limited to the incentive they received. When this happens referral can look like a very efficient acquisition channel.

The only way to really know whether a business can afford to remove the minimum spend constraint, and to get comfortable with the risk, is to test it. If you don't, you may be leaving a very big referral marketing opportunity on the table.

In this case, being generous isn't just about the warm feeling inside, it's about a potentially very big impact on the number of referrals you can drive.


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