The Secret to Referral Growth Without Cannibalizing Sales

Referral programs can be an incredibly powerful growth tool, with 84% of customers trusting recommendations from people they know far more than any brand advertising. But designing an effective program is complex, requiring careful balance across incentive amounts, targeting, timing and measurement to maximize new customer acquisition without cannibalising sales.

In this post, we’ll walk through a framework for architecting a referral program, from why they work so well to hacks around setting the reward amount. You’ll learn high-leverage tips on who and when to ask in order to increase acceptance rates, as well as methods for accurately calculating incremental value generated. Finally, I’ll also cover how to use the same learnings to add viral features to your product.

Why run a referral scheme?

Let’s start with the key question. Why should brands use referrals? Referral schemes are rarely the n.1 driver of growth for brands, but there are 4 reasons why consumer brands should drive growth through referrals:

• Trust: Referrals carry an inherent credibility that traditional advertising lacks. When potential customers hear about your product or service from someone they know and trust, they're far more likely to be swayed. Referrals can increase brand equity and sales without making consumers feel like they are being sold to.
• Targeted Lead Generation: Referrals provide a unique opportunity to reach a highly qualified audience. Recommenders have effectively pre-screened potential interest, making this more efficient than broad-target paid ads.
• Cost-Effectiveness: Referral marketing leverages existing customers' networks, offering a cost-effective alternative to expensive ad campaigns. This method utilizes the influence of your customer base at a cost lower than the average Customer Acquisition Cost (CAC).
• Enhancing Customer Loyalty: Rewarding referrals not only attracts new customers but also strengthens relationships with existing ones. This can create a self-sustaining cycle of growth and possibly foster a sense of community.

How to run Referrals

While they can be highly impactful, there are several ways to do referral schemes that are not effective. There are a number of elements that need to be nailed in the execution of referrals to make sure they are impactful and value adding.

Focus on impressions, not conversion.

Don't get hung up chasing conversion rates. Share referral asks repeatedly instead. The key to igniting a referral cascade lies in maximizing the number of times customers are exposed to your referral program. This can be achieved through a combination of in-app pop-ups, email campaigns, and social media prompts. Target newer users with fresh appeal. Maximum impressions drive awareness and sharing velocity.

When to ask

Timing matters hugely for referral asks. You should engage users precisely when they're happiest. Ask just after a great customer service experience. Look for signals of brand love; recent repeat buys, glowing reviews. Then pounce quickly in-the-moment to capitalize on delight. Vary touchpoints too - hit different contexts. Send personalised email appeals. Retarget referrals onsite after key actions. Social ads keep your brand top of mind. Master the timing, and each interaction becomes an easy, reasonsable ask.

Make it easy

Friction kills referrals. Meet users on familiar conversational platforms. Integrate sharing into chat tools they already live in. Minimize steps to boost conversion rates. Make referral sharing as seamless as saying hello. You can easily set up referrals on channels like WhatsApp with platforms like Merx.

Get the Rewards right

Finally, set (and test) the right rewards. Typical CAC vs LTV approaches to referral incentives overlook cannibalization and critical human psychology. Consumers often prefer simple schemes (give 5, get 5) and have little elasticity to increases in rewards. We also recommend testing asymmetric rewards. Each brand is different. Some customers will happily refer a brand without a reward (in some cases even more so!). Other brands have found that inviter centric rewards were effective in turning customers into sales people.

Be wary of cannibalisation

While referral marketing offers a powerful engine for growth, it's crucial to exercise caution and avoid cannibalizing existing sales. Cannibalization occurs when a referral program redirects potential customers away from your existing marketing channels, ultimately hindering overall growth. If a consumer searches and finds a referral code shared from a stranger online before checking out, the scheme only led to a margin reduction.It's easy to only see the top line growth, missing margin erosion.

Compare acquisition costs excluding and including incentives. Design rigorous A/B tests with control groups to isolate effects. Run "twin city" experiments to model organic word of mouth sharing. And where possible, choose referral mechanics that minimise cannibalisation.

At merx, we have developed a unique approach to WhatsApp referrals that guarantees that all referrals are made organically between contacts. While this may lead to a lower number of purchases made through referrals, it reatly increases ROI.

Consider viral engines

Don’t stop at referrals. For sustainable energy, build vibrant, viral engines. Embed social sharing and communication into core product experience. Help users invite teammates, collaborate on projects. Design features that create innate engagement and retention. Secondary benefits cascade, as delighted users recruit friends. See how Dropbox built virality into file sharing, permissions. And how Uber sparks organic adoption through group orders. Viral loops become perpetual motions, evergreen growth. Referral incentives must be continually refreshed, recrafted.

At Merx, we believe conversational commerce will significantly fuel viral features that add value to customers, while helping brands grow organically. So continually invest in infectious product love. Do this right, and you won't need gimmicks to fuel scalable, efficient growth.