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Should you offer incentives for referrals?

- Carl Maerz is a co-founder of Rocket Referrals

Referrals are nothing new. People have been making recommendations to their friends and family since the Ice Age. In fact, in the olden days, word-of-mouth was the primary way of discovering new products and services. Back then the village carpenter, of sorts, would likely ask Captain Caveman if he had any Neanderthal buddies in need of a new club. He had to make a living, after all.

Fast forward to the 21st century (thank God) and, until recently, referral strategies hadn’t evolved a whole lot. In most cases, a proactive approach to obtaining referrals consisted of asking a client for the names of a couple of friends or family members. Over time, new strategies were developed aimed at leveraging existing clients to acquire new business. These methods were mostly a consequence of changing technology which influenced the way we communicate. As these strategies became more popular they were encapsulated by a single term: referral marketing.

Gas referralReferral marketing became popular with the success of incentive-based programs whose proliferation was greatly influenced by the internet. A prime example is the file-hosting company Dropbox that realized massive growth after introducing a program that rewarded its members for referring their friends. Due to their success, Dropbox became the poster child for referral marketing and, on that account, incentive-based programs were the new gold standard.

It wasn’t long before companies followed suit and started incentive-based referral programs of their own. This strategy worked well for some businesses, and flopped for others. This left many befuddled and raised the question: why were incentive-based programs proving to be hit or miss?

It turns out that incentive-based programs are more successful for companies offering products and services where personal relationships with clients aren’t paramount. On the other hand, for those companies that value business-client relationships, monetary incentives actually backfired.

This is because offering rewards for referrals is the quickest way to convert relationships once founded on trust into those that orbit money. Offering $10 gas card, for example, places a monetary value on the referral. This confirms that the business craves referrals simply because they convert to revenue.

Sociologists call this a shift from social to market norms. From ‘What can I do for you’ to ‘What can I give you’.

Remember, in relationship-focused industries, one of the most powerful reasons people refer is to help their friends and family – not for ten bucks. As soon as a monetary reward for new business is introduced into the equation (being your relationship) your client will feel like you are after their friends and family for a fatter bottom line, not necessarily because you want to help them.

So, should you offer incentives for referrals? The answer depends on your business model. If you’re a service-based company where client relationships are valuable, then it’s better to hold off. On the other hand, for companies that offer products and services where personal relationships aren’t particularly important, incentives can be an effective way of encouraging clients to spread the word.

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