Customer Referral Programs: Simplify or Die

From small credit unions to Bank of America, referral programs of all shapes and sizes have hit the market. The success (or failure) of any referral program hinges almost entirely on your design — the rules and mechanics of your system.

At the highest level, a referral program gives existing customers the ability to refer their friends, family and colleagues through structured channels. Currently we estimate that 30% of North American banks and credit unions are currently running referral programs. Some programs are highly sophisticated and use automated software to manage the referral life cycle, while others are no more complicated than this: “Fill out our form and give it to a friend.” In either scenario, the design of the program will dictate the ROI. A sophisticated, fully-automated software solution makes sense for institutions with 250,000+ deposit accounts, but not for a small credit union with a handful of branches. In the latter scenario, a more manual, hands-on program that can be facilitated through staff interaction might make more sense.

Marketers at banks and credit unions that have never run a referral program might be asking, “Is this type of initiative really worth the effort?” After all, the current marketing mix produces consistent results with very little risk… and, relatively speaking, not as much effort as a full-blown referral program. So how do referral programs stack up against traditional marketing channels and acquisition strategies?

Research has found that the average cost-per-acquisition (CPA) for financial institutions (across all product categories) typically ranges anywhere from $250 to $400 per net new deposit accountholder. Referral programs for deposit products often offer cash spiffs — $50 for the referring customer and $50 for the new customer — putting the CPA between $110-175, which is still significantly below the industry average. Even better, the exact CPA will be clearly established, as all issued rewards are tied directly to a new account being opened. More sophisticated programs involve real-time reporting where every stage of the referral lifecycle can be viewed, as well as channel analytics, conversion percentages and leaderboards.

The design of a referral program, both in terms of user experience and business rules is where most programs fail. The most consistent design flaw of a failed program is a brand that sets the program up so that it is easy and convenient for them to manage… but fails to consider the end user. For example, requiring burdensome eligibility criteria before issuing a low value reward is a sure-fire recipe for failure. There should be limited qualifying criteria. Where you ask more, you should give more in return.

Monetary rewards always provoke the best behavior in terms of participation in the program and the conversion rate of people who were referred to those who actually become new customers; pre-paid credit cards hold a slight edge over account credit although the difference in performance is only minimal. The number of steps customers and prospects have to take to earn their reward should be minimized wherever possible, as with each additional step you introduce additional drop off which cumulatively will impact program performance.

Here is a list of common mistakes brands make when setting up a referral program:

  • Only providing customers with one channel to make referrals. Some customers will prefer to refer using email, while others will want to use LinkedIn. More channels equals more referrals.
  • Low reward or burdensome path to earn a reward. Either design flaw is a deathblow for a referral program. Make it easy, quick with as few steps as possible for a reward to be earned. There are plenty of financial service providers to choose from, and many of them offer rewards for new customers.
  • Make the program available for as many of your customers as possible. Rather than excluding certain types of accounts or product lines, make the reward variable and based on the new customer being acquired. For example, if a referral generates a customer that opens a basic (free) type of checking account, the reward should be lower than for a referral that generates a higher revenue customer.
  • Running a referral program as a limited time promotion. Referrals happen organically, meaning people refer when they know someone who is looking for your service. Running a short term program will only capture those who have someone to refer at that moment, which likely won’t be worth the investment of setting up the program. Longer programs mean more of your customers refer, and those who previously referred will come back and do so again.
  • Limited awareness efforts. The best program in the world won’t mean much if nobody knows about it. Find ways to incorporate awareness of the program in all of your existing marketing channels, from in-branch signage to website banners. More awareness equals more referrals.

The reward chosen by the brand will be one of the top influencers of program performance, so it is important we highlight the most important considerations when choosing it. All too often a referral program will have a low value reward, or an “offer” which requires a purchase. Although these are great for the bottom line, they are hardly motivating. The best rewards will be as high as possible while still ensuring the brand meets or beats their desired cost per acquisition (CPA). Remember, your customers are referring their most trusted relationships, they should be rewarded accordingly.

Ultimately, the referral program you design should be as simple as the concept itself. Turn your customers into a sales channel, and motivate them to do so through a perceived high-value reward. Consider these factors:

  • Make it easy. The referral action should be simple, with no additional steps required. Filling a form or asking them to remember a referral code for tracking may make it easier on the back end, but it’s a terrible user experience that will never generate momentum.Make it easy for your customers to generate many referrals instead of “one and done,” which means give them online channels such as social networks and e-mail accounts like and Gmail.
  • Make the reward meaningful. Referral programs that acquire new deposit accounts usually give $50 for the referrer, and $50 for the new customer. A higher reward equals better results, it is that simple.
  • Invest in your program. Your customers must be made aware of the program, and continually reminded of it. The goal is to train them to refer when they know someone who is looking for your services. Marketing support and employee training will pay significant dividends in the ROI from a referral program.
  • Automate the process. Automating the program on the back-end means a simple and clean process for the user, which is at the heart of every successful referral program.

Brent Wilker is the Senior Director, Sales & Marketing for RewardStream, a referral marketing agency founded in 1999. The company delivers a proprietary, real-time technology platform as the foundation of their client’s referral programs and have processes over twenty million referrals for some of the world’s largest brands.

This article was originally published on . All content © 2024 by The Financial Brand and may not be reproduced by any means without permission.