Incentivised Referrals: Pure gold or fool’s gold?

Read time: 4 minutes

Customer recommendations to friends and colleagues are pure gold for a business. The very best companies generate most of their new customers this way.  Most leaders intuitively understand that few actions can accelerate growth as profitably as boosting their customer referral rate.   

Yet, Andrew Chen, the Andreessen Horowitz partner and former Head of Growth at Uber threw the cat amongst the pigeons last week when he tweeted that Uber’s referral program wasn’t the success it’s long been considered.  He asserted that “the people you attract with referral programs are usually MUCH WORSE than organic ones.” 

In the same week, the Wall St Journal wrote a piece describing how Tesla’s customer referral program had become “fuel for a ragtag online missionary force for Tesla” who were motivated solely by the idea of racking up thousands of dollars of referral rewards. 

These two companies are often held up as exemplars of referral marketing success, and so does this mean that incentivised referrals are nothing more than fool’s gold?

I’ve got a strong - and deeply informed - view on this, having set Mention Me up ten years ago in order to solve the challenges inherent in trying to grow from referral. The whole premise on which we founded the business was that referral should be the best way to grow but most businesses struggle to get it to work. Since founding Mention Me, we’ve run over 45,000 tests on more than 4,000 referral programs. We’ve enabled 36 million brand advocates to share with friends and facilitated $2.2B of value from referrals. And so we’ve learnt what works and what doesn’t. 

It’s worth acknowledging that there is a difference between unincentivised referral and incentivised referral. Unincentivised referral, a spontaneous recommendation by your customer, is the most perfect referral. It would be great if businesses could rely on this for growth but very, very few are able to do this. And I have not met a single business that has grown in this way that is able to do so whilst measuring their referral flows.  Because of this referrals remain a black box – not yet accessible to scientific measurement and learning. Without real data on referrals and their root cause, businesses end up spending on paid channels, unsure of how much would have come in from referral if they weren’t ploughing most of their marketing budget into Google and Facebook. 

Adding an incentive enables you to capture the data on referrals, illuminating the underlying process so business leaders can create and execute marketing strategies that optimize referrals. You can drive optimization both in the way you design your referral program and also in the way you engage and treat your customer and give your them a reason to love your product, service or brand. 

We have learned at Mention Me that done right, with an appropriate incentive, referrals can be illuminated, tracked and maximized, providing a really powerful driver of value for a business by bringing in high quality customers.  Customers spend more if they come through an incentivised referral program. They spend 22% more than non-referred customers and 14% more than customers who say they were referred but didn’t come through a referral program. And they stick around longer. The proportion of customers who were referred increases by every purchase they make. Across our clients, the proportion of returning customers who have been referred increases by 30% from 2nd to 3rd purchase and by a further 20% from 3rd to 4th purchases. 

The incentive in referral is a fascinating component. We have conducted countless customer interviews and focus groups to understand the psychology behind refer-a-friend marketing and to understand why customers choose to share. In the vast majority of cases, the incentive is not enough to make someone refer. Offering $5, $10, or $20 may make it easier to have a conversation with a friend but it is nowhere near enough to make someone recommend something that doesn’t merit a recommendation. 

Instead the decision is driven by social psychology. In the microsecond when you are deciding whether to refer or not, your cogs start whirring, and you start calculating whether it makes social sense. Is there any social risk? Will your friend judge you negatively? If not, you immediately try to work out whether the recommendation will increase your social capital with your friend. We ask ourselves, “will this recommendation enhance my relationship?”. If the answer is yes, a recommendation is likely. But many of us set that bar very high.

The social component far outweighs the role of incentives. The incentive acts as oil in the machine to make the referral conversation easier, rather than the motor that is driving a referral to happen in the first place. It should serve as a nudge, not a bribe.

Referrals also shine a light on how to run a business. Fred Reichheld, the creator of the Net Promoter System, recently wrote about this in the Harvard Business Review and observed that “firms today undervalue referrals. They treat them as icing on the cake rather than an essential (perhaps the most essential) ingredient for sustainable growth.”

In his recent book, Winning on Purpose, Reichheld recommends that all businesses adopt the Earned Growth Rate as the key metric to understand if you’re growing in a sustainable, profitable way. Earned Growth tracks growth from existing customers and growth from referrals. It indicates what a business’s growth rate would be if you didn’t spend a penny on sales and marketing. Once you start tracking Earned Growth you realise that referrals are critical to validating that your investment in creating an incredible product, service, and experience is actually resulting in growth. 

When done right, referral incentives and the technology to track customer advocacy is vital for building the referral science that not only creates a practical way to generate new customers but a deeper understanding of the strategic priorities required to generate more referrals, more valuable customers and sustainable, profitable growth..

So, if referrals are pure gold, why is Andrew Chen claiming that for Uber they were more like fool’s gold?

The simple answer is that you can structure referrals to create or destroy value. There is a right way and a wrong way of doing referral marketing for long term value creation. When the incentives become too big, either in absolute terms or in the context of what they are being asked to pay, it can distort the true referral dynamic. In these cases high incentives can result in higher volume of new customers coming through but lower quality. Ultimately there is a price elasticity curve on a referral incentive and each business needs to find their sweet spot on that curve to solve for whichever metric matters most to them at the time: growth or customer quality. 

In terms of optimizing business for Earned Growth, we’d always recommend leaning towards quality. But when a business is in a “grow at all costs” mindset it is very common to sacrifice quality for volume. If Uber had reduced the incentive they would have reduced the volume of referrals but they would have increased quality. As Andrew Chen says at the end of his tweet, “incentives are a form of selection and you need to make sure you know what you’re selecting for.” In this use case, Uber was incentivising for taking market share, not customer quality. Tesla have fallen into the same camp with incentives worth thousands of dollars. 

But it’s not too late. Referral programs are dynamic and should be constantly adapted to serve the business’s needs of the time. It’s never too late to switch out the fool’s gold for 24-karat referrals. 

Learn how to drive truly high-value customer acquisitions, nurture fans into brand advocates and put your business on a path to sustainable growth and profitability: Request a Demo.