The Referral Revolution: Sharing is Caring

Examples of such incentives may include discounts, vouchers, exclusive offers, cashback programs, and other rewards. For referral marketing to work, a registration process is required in which customers send personalized links to their contacts.

Affiliate Marketing & Influencer Marketing

In addition, there are similar forms that use the same principle as in referral marketing. In affiliate marketing, individuals commissioned by the company promote products or services and receive commissions when sales are successful.
Another example is influencer marketing, where companies hire influencers to persuade their followers to buy by sharing discount codes or simply presenting products. In return, influencers receive a certain amount of money, free products, or a commission from sales.

The credibility factor in referral marketing

Despite the undeniable effectiveness of referral marketing, it also comes with challenges.
It is often perceived as less credible and not authentic, as the recommendations are made on the basis of incentives and not from intrinsic conviction. This procedure can be regarded as a type of bribery and there is therefore a risk that the recommendation made will be classified as dishonest and not authentic.

In addition, the recommendation does not necessarily have to be relevant to recipients. It is therefore quite possible that recommendations are made arbitrarily just to receive the promised reward and that they are not sent to potentially interested new customers. As a result, the chance of purchase recommendations being addressed to the relevant target group is lower in referral marketing.

Intrinsic motivation vs. referral marketing

It is important to differentiate intrinsically motivated recommendations from referral marketing. While intrinsically motivated recommendations are based on genuine convictions, referral marketing includes a transactional element in which people receive incentives to make recommendations. Although referral marketing requires minimal investment at first, it can become very costly over time. The initial low costs can even expand into significant budget burdens due to the need for attractive incentives, commissions and administration of the referral program.

“While recommendations with incentives can inspire word of mouth, they may not be as effective as organic word of mouth marketing if potential new customers are aware of the paid nature of the activity. ” Trusov et al.

Intrinsically motivated recommendations, on the other hand, are created without incentives and from the personal motivation of consumers. These are therefore significantly cheaper and more effective, as customers weigh up in advance who could actually benefit from the recommendation. This results in significantly more valuable leads compared to indiscriminately incentivized recommendations.

Long story short

Referral marketing makes use of consumers by sharing incentives to increase brand awareness and attract new customers. However, this approach requires tackling challenges such as lack of credibility, rising costs, and increasing complexity.

The trick is to generate intrinsic recommendations. They are more authentic, generate higher quality leads and save costs. But that is easier said than done. Most companies are optimizing their products or services and hoping for recommendations. Therefore, paid options such as referral marketing are often used. Fortunately, there are the first tools that enable the strategic use of Word-of-Mouth.