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Launch a Referral Program for Your Small Business

How to Create a Referral Program Thumbnail GraphicHow to Create a Referral Program Thumbnail Graphic
min read
August 21, 2023

If you have been in business for any length of time, you have a secret.

A secret to your success.

It could be almost anything. It might be a product that blows away the competition or your customer service that does the same thing. It might be that great location you scored or the social media campaign you perfected. But, whatever it is, it is your recipe for success. It is your “secret sauce.”

My dad was the best entrepreneur I ever knew, and his secret sauce was amazingly simple, boiling down to just a single sentence that he in fact had printed onto a giant banner that he hung in the back of his huge carpet warehouse. 

It was the very first thing that customers saw when they walked in.

“Our word-of-mouth advertising starts with you!”

25 years in business, millions of dollars of carpet sold, hundreds of employees, thousands of customers, and every customer acquisition and retail marketing trick in the book tried (sidewalk sales, TV commercials, billboards, jingles, celebrity endorsements, and more) and the biggest lesson dad came away with is that nothing beats word-of-mouth advertising.

Interestingly, while my sweet dad created what was, at the time, the largest chain of carpet stores in California, his takeaway is even more relevant today. Why? Because we live a far more interconnected and information-laden digital era.

As you well know, what consumers (especially younger ones) look for today is authenticity, and they often get it by talking to their peers, checking in with loyal customers, and reading online reviews from real people. Indeed, according to a recent survey from the “Chatter Matters Word of Mouth Reports,” 83 percent of shoppers say word of mouth strongly influences their buying decisions:

“Though internet search ranks as the most popular source for researching a product, family and friends follow close behind as important sources of information. Forty-six percent of respondents say family members are a resource when researching a potential purchase, and 45 percent say friends are important.

Moreover, 92 percent of consumers trust recommendations from friends over brands and brand advertising. But you know this intuitively, right? If your best pal tells you about a great shop or product or website, you are far more likely to trust that and check it out than had you seen a Facebook ad for the same.

Given that, why aren’t you making more of an effort to get referrals? 

How do I know you are not following my dad’s sage advice (said the mushy son)? Because, according to that same Chatter Matters report, only “one percent of companies have an actual strategy for generating these crucial customer conversations.”

But guess who did get the memo?

These huge companies became huge, in part, by targeting and incentivizing their best customers, turning them into stark-raving fans, creating referral campaigns, having them share their passion for the product, and then helping them to get their friends and family on board. The best referral programs foster customer loyalty and create brand advocates.

Many smaller businesses do the same, to great effect, and you can – and should – too.

Referral Programs in a Nutshell

So, what exactly is one of these valuable referral marketing programs?

Here's how it works: Essentially, referral programs are loyalty programs. They increase your word-of-mouth marketing by creating an organized referral process and referral incentives. Referral programs encourage customers to share their passion for a business or product and reward them for suggesting that business to potential new customers. 

Far more than simply asking people to “Like us on Facebook!” or having them write a review on Yelp, referral programs create profit, value, and growth by giving the best customers a reason to, well, refer new potential customers to the business.

Let’s use Tesla as an example. After their first purchase, Tesla owners are notoriously passionate about their vehicles. Indeed, Tesla has a customer satisfaction rating that is an 89 out of a possible 100, tops in the industry. Tesla owners love Tesla cars.

Given that, it only made sense that Elon Musk and Tesla would seek to capitalize and monetize that fact. How? The key for Tesla was to give its most passionate fans rewards that they truly would not only like,  but would actively seek out by sharing with the company people whom they know who would be a “qualifying referral” (QR). 

Check it out:

The winner of the “contest” actually ended up making 188 successful referrals, which generated more than $16 million in sales. 

Talk about brand loyalty.

Overall, as impressive as that iteration of the Tesla rewards program was, Tesla’s sales results were even more so. The company generates 42x on every marketing dollar spent on the referral programs, and by Q4 of 2015, that particular referral program was responsible for 25 percent of all Tesla sales.

Maybe, you are thinking, Tesla is an outlier, that its zealous customers are more the exception than the rule and that a regular business could never expect to create similar results.

That would be incorrect.

A while back, the Harvard Business Review wanted to see if referral programs really are worth the effort for a typical business, say, maybe even a boring business. Like a bank maybe. So HBR examined the records of 10,000 accounts at a German bank over a three-year period. 

The name of the article in which they published their result belies their conclusion:

“Why Customer Referrals Can Drive Stunning Profits.” 

The HBR analysis concluded that “customers obtained through referrals are both more loyal and valuable than other customers.” Specifically, 

Referral rewards can be almost anything – money, discounts, free product, giveaways, special offers, store credit, a free month, free cars…whatever it is that your customer base would find enticing is what you should go with.

Take, for example, Budsies. A small business if ever there was one, Budsies began in 2013 when founder Alex Furmansky wanted to create a way to make his little sister’s artwork stick around just a little longer and not end up in a forgotten box in the garage. What if, he thought, there was a way to turn her artwork into a customized stuffed animal?

Budsies was born. In Alex’s bedroom.

An ingenious idea offering a great customer experience, Budsies allows anyone to take a piece of art (typically children’s art) and have the Budsies team turn it into a 3-D plush toy. Needless to say, parents and kids alike loved the business and the toys they created as a result.

Very quickly, people started to organically recommend the site to their friends and Alex knew that he needed to capitalize on that. Enter the Budsies referral program, a program that succeeds for both referrers and the referred alike. Referrers get 20 percent off…and those who are referred to Budsies also get 20 percent off.

It worked, increasing sales, buzz, conversion rates, and much more:

Referral Programs Pros and Cons

Clearly, there is a ton of potential in this type of marketing strategy. But those rewards, like anything in business, do not come without some risk for entrepreneurs and marketers.


1. Customers Become Salespeople

 As my dad well knew, nothing beats the endorsement of a happy customer. Referral programs take this truism and turbocharge it by giving those evangelical customers a financial incentive for promoting their love of the business. Transforming happy customers into an army of (essentially) unpaid salespeople is a no-brainer.

2. Unique, Qualified New Leads

Not everyone will see your ad or notice your social media post. But even if they don’t, your current customers have a network of people who pay attention to them. And that means that when they refer one of their people to you, you have a new lead that is far more likely to be interested in what you sell because their friend, your customer, has already vetted them for you.

3. Loyalty

Your customers will become even more loyal if you reward them for that loyalty, and the customers that you earn from the referral program will likely be equally loyal because the way they entered into your orbit comes from the word of someone they trust.

4. Increased Sales 

As Tesla and many others can attest to, referral programs are money makers. 

5. Cachet

Referral programs have a certain prestige factor. If your customers love you that much that they are willing to recommend your business to their tribe, that is not nothing.


There really are not a lot of downsides to creating your own referral program, but there are a few.

1. Margins

Some businesses, restaurants for example, operate on very tight margins. As such, there is not a lot of wiggle room to add in discounts for referrers, especially if they become serial referrers.

2. Overhead

Of course, there will be costs associated with your new marketing program. Not only will there be the administration and operation of the referral program itself, but also, if it works like we want it to, there will be added overhead costs needed to manage increased sales.

3. Interest 

Referral programs only work if you have customers who like your business, product, or service enough to recommend it to others. If your business, for whatever reason, does not command that kind of loyalty, a referral program would likely be a waste of time, money, and effort.

How To Create Your Own Customer Referral Program

Needless to say, these programs can really foster both word-of-mouth – and even better – sales. How do you create such a program for your small business? These are the steps:

Think about Your Goal

Tesla clearly had more than sales in mind when it created its unique referral program. For starters, the company wanted to add to its allure and buzz by being known as a business that people talk about. Moreover, they obviously also intended to reward their best customers with truly valuable gifts. And yes, they wanted to increase sales.

Check, Check, and Check

So start with the end-game in mind. What are your goals? What do you hope to achieve with your referral rewards program?

Think about Your Customer

Before you go looking for new customers, you need to know who your current ones are if you are going to create a referral program that they like and want to take advantage of. Who are your best, most satisfied customers? What is it they like about your business?

Your best customers need to be the target of your nascent referral program.

Offer Real, Valuable Rewards

This is based on your customer profile. What is it that would incentivize your customers to act on your behalf? It cannot be little and should not be cheesy. Your rewards are part of your brand and your marketing; they have to dovetail easily with both. 

As indicated, rewards can be almost anything: discounts on their next purchase (if that is what they might like and is what you hope to achieve), a gift card, recognition, you name it. Again, and this has to be underscored, the benefit has to be good enough that it emotionally and monetarily clicks with your best customers in such a way that they feel compelled to act.

But, what if you cannot yet afford big discounts or other “pricy” rewards? Fear not. In-kind offers and experiences work well too. Remember, Tesla offered guided tours of factories. Dropbox offered storage space to referrers. Or what about swag? If you have a cool brand or logo, your top customers might really like that.

Create a Win-Win

The best programs are those that reward the referrer and the referred. Refer a friend and you both win!

Make It Easy

No matter how much your customers may like or love your business, if signing up for your referral rewards program is complicated, if your landing page doesn't make sense, then they won’t follow through. Keep it simple, easy, obvious, and transparent. Customers must understand how to sign up and what they will get if they do refer someone to you. 

Marketing Your Referral Program

Like any marketing campaign or sales program, there is little value and even less reward if you don’t market the heck out of it. Customers have to be made aware of the program, and as we all know only too well, these days getting noticed above the din is no easy task. But that is what you must do if you are to win at this game.

Because customer referral programs can be so financially rewarding, and because they target your very best customers, care must be taken. Your promotion and branding has to be top-notch. It is not just a matter of putting the program on your website; often it is much more of a personal, hands-on approach that works. Salespeople and others who work with your best customers should be trained in your program and they need to be encouraged to tell your customers about it.

Beyond that, all of the customary marketing methods should be employed:

But making people aware of the program is only the beginning of your marketing efforts. If you want your program to really pay off, not only must your best customers be made aware of it, not only must they sign up for it, but they must remember to act on it.

Follow up, follow up, follow up, and then remind.

Share stories of customers who received some great benefit from referring a friend. Share the story of the new customer who got a benefit too and why they chose your business. Offer additional and new incentives so as to generate new buzz and attention as time goes by.

It is also important to promote your program at times when your customers are most excited about your business – when they shop or check-out, when they get great results from something you have done with or for them, when you get some great online reviews or social media love from your customers, that sort of thing.

Referral Program Dos and Don’ts

Here are some quick tips and things to avoid when it comes to running your own referral program.


Follow-Up Quickly

When you get a referral from a happy customer, that is marketing gold. Don’t waste the opportunity that the referral provides. Follow-up with the potential new client as quickly as you can.


Keep it simple, silly. Sure, your best customers love (or like) your business, but there are limits. They will be happy to help you, and themselves, but only if it’s easy to do so.

Make It Shareable

Make it easy as well for customers (new and old alike) to share their experience, as well as your referral program benefits, on social media. Have social share buttons on the appropriate pages and in the appropriate places.


It may be that your business lends itself to using a cloud-based referral marketing software program. A few to check out are:


Pick the Wrong Rewards/Incentives 

The key to this whole thing is having a rewards program that gets someone to take action on your behalf. That just ain’t going to happen, no matter how much they like you, if your incentives do not incentivize.

Keep It a Secret

This is a marketing campaign. Treat it as such.

Fail to Reward Extra Referrals

Once a customer refers someone to you, they are far more likely to do so again, but again, they need some reason to beyond altruism. Creating a tiered reward system for extra referrals does just that.

So what are you waiting for? This easy, affordable marketing trick can reap huge rewards. And, remember, if you like this column, share it. Why?

Because our word-of-mouth advertising starts with you!

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