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At ReferralCandy, we know that choosing the right referral rewards can be daunting. With so many options—cash or custom reward, flat discount or percentage—merchants ask us all the time about which incentives are better.
It all depends on your brand and your business, but we’ll help you figure it out.
Here’s our comprehensive guide (with plenty of examples!) to walk you through how to set up your referral program for success; from understanding the types of referral incentives, to choosing the type of referral rewards, and even making customizations to keep your referral program in line.
Why is choosing referral incentives important?
Incentives modify human behavior. Choosing the right referral incentives means that your customers are motivated to make a referral.
Research shows that of every 10 satisfied customers, 8 want to tell a friend, but only 3 customers actually do.
An attractive referral reward might just nudge them to make the effort to be a spokesperson for your brand.
The right referral incentive will also make it easy for new customers to buy. A tempting discount combined with a friend’s recommendation makes an offer you just can’t refuse.
Here are the four steps we recommend when choosing your referral incentives: (click to jump to each section)
Step 1: Choose your incentive structure
You might have heard terms like advocate reward or friend offer—what does that mean? I’m glad you asked.
Friend offer: How can you make it easier for new customers to buy?
A friend offer is an incentive a referred customer receives when they make their first purchase. In general, friend offers tend to be a discount on their first purchase.
This is something that would make their first purchase a no-brainer. It could be a discount for being a new customer, a ‘starter’ subscription box, or even free shipping. The goal is to incentivize them to make their first purchase from your brand. There's no perfect amount, but we've observed that retailers that offer at least 10% off for Friend offers enjoy a higher referral rate.
Many ecommerce stores today already offer a discount for your first purchase, either on their hello bar or for signing up for their newsletter. UNTUCKit gives you a generous 20% off if you’re a new customer.
You want customers to use your referral link, so make your friend offer more generous than the welcome offer. UNTUCKit gives referred customers an even more generous offer of 25% off!
Here are some other examples of friend offers that sweeten the deal, and make it easier for new customers to make their first buy.
- Momomi offers 10% off your first order of their baby-friendly wool rugs.
- Cycleboard offers $100 off their motorized skateboards, which is about 10% off a board that costs $1300
- Riff Raff & Co offers free international shipping for their sleep toys (equal to a 20% discount).
You may notice that UNTUCKit also gives a 25% discount to the customer who refers a friend - that reward is what we call the advocate reward.
Advocate reward: How can I thank my loyal customers for referring their friends?
An advocate reward (sometimes called a referral reward) is what your existing customer receives when they refer a friend to your brand. To follow the example from above:
- Momomi gives existing customers a cash reward, equivalent to 6% of their friend’s purchase value.
- Cycleboard gifts existing customers $100 via PayPal for each successful referral.
- Riff Raff & Co rewards customers who have made 5 successful referrals with a free toy.
Advocate rewards come in different types and value. One way to think about it is that your customers already love your brand, which is why they are inclined to refer a friend. So, how can you offer them more of what they love?
We cover the types of advocate rewards more extensively in the next section, but some ideas are:
- If your customers are likely to make a repeat purchase, offer a store discount or free shipping, so they can make another purchase.
- If your product is expensive or has a long purchase cycle, you can offer a cash reward.
- If you’re a subscription box, you can offer a free month or box for every new customer referred.
By offering both a friend offer and an advocate reward, you’ve created a two-sided referral program.
What is a “two-sided referral program”?
A two-sided referral program means that both sides of the referral get rewarded for a successful referral; the advocate gets the referral offer, and the new customer gets the friend offer.
Most referral programs are two-sided and equally balanced. Most commonly, you’ll see something like “Give 10, Get 10” or “Give 25, Get 25”, whether it’s in dollars or percentage off. Some examples of this tried-and-true formula:
- DIY home goods supermarket Do It Center offers Give $5, Get $5
- Secondhand Mac products store Mac of All Trades runs a Give $10, get $10 referral program
- On the higher end of the scale, Cycleboard offers a generous Give $100, Get $100
Two-sided referral programs feel good because they are a win-win for both advocates and friends.
It taps into the principle of reciprocity; you give your friend a nice discount, and they help you earn a referral reward.
As a bonus, it also serves as a conversation starter. How will you spend your discount? Which color should we get?
Remember, incentives modify behavior. A two-sided referral program incentivizes both existing and new customers to be a part of the referral program. One-sided programs are more like affiliate marketing - check out the section on lopsided programs below.
For now, let’s consider the different types of referral incentives.
Step 2: Select the type of referral incentives to offer
After speaking to many merchants over the years, we realize that analysis paralysis is a common problem. There are so many types of referral incentives we can offer, and which is the right one?
We’ve narrowed it down to three categories to make it easier for you to decide: cash rewards, store discounts, and custom rewards
1. Cash rewards - The easiest, most versatile referral reward
(+) Universal, practical reward; scalable and repeatable
(+) Even $5 in cash will motivate customers
(-) Complicated to manage, unless you use referral software
Cash is the most versatile of all reward types. Everyone likes (free) cash, and even $5 will motivate a customer.
Cash rewards are repeatable and can be earned many times. Whether you refer three friends or 30,000 friends, the cash reward will be equally valuable. Also, cash reward payouts are easy to automate with referral marketing software like ReferralCandy.
If the product has a long buying cycle or a one-off purchase, cash is a good choice. For example, mattresses can last for up to a decade, and it’s rare for someone to buy them again within a short period. That’s why mattress brand Endy Sleep offers $50 cash for a successful referral.
CriticalPass sells study aids to help customers pass law school exams. Customers never have to make a second purchase, so CriticalPass offers $10 in cash as a referral reward. The cash reward works well because seniors and managers can still recommend CriticalPass to their juniors taking the exams - and $10 is still $10 they can spend anywhere.
You can also offer customers a percentage of order value as a cash reward. Watch brand Dappertime rewarded customers with 20% of their referred friends’ order value, almost like a commission for a successful sale.
Offering cash rewards also gives you some of the advantages of an affiliate program. If any of your customers are content creators or micro-influencers, they will be motivated to create content featuring your brand as a bonus.
For example, Christy Dawn offers $30 in cash as an advocate reward. One of their top referrers is Kait Bos, a fashion blogger and YouTube creator, who’s driven hundreds of new customers to Christy Dawn with her vlogs and blogs.
2. Store discounts: Perfect for products you can purchase again
(+) Great for products you can purchase more than once
(+) A valuable tool for customer retention
(-) Less scalable, less repeatable than cash discounts
Store discounts are most valuable when your customer can make repeat purchases - for example, fashion or pet food, or if your store has a wide variety of products, like a DIY store.
Offering a store discount can help customer retention by prompting a repeat purchase, for example:
- Seraphine sells maternity wear and offers a 15% discount coupon as a reward for referring your friend
- Branch Basics sells cleaning solutions; and offers a referral reward of $10 off when you next purchase a refill.
- A Box of Stories mails you four books every month, and if you refer a friend, you get $4 off your subscription box for the next month.
Store discounts can come in several different forms:
- A flat cash discount (e.g. $10 off your next purchase)
- A percentage store discount (e.g. 10% off your next purchase)
- A free month for subscription box services
In general, store discounts are awarded as coupon codes. But should you offer a flat discount or percentage? You might want to consult the Rule of 100, which we discuss in more detail below.
Store discounts as an advocate reward help to prompt existing customers to make another purchase. Most friend offers are store discounts, to motivate new customers into making their first purchase.
3. Custom reward: The rewards only your brand can offer
(+) Delivers a unique customer experience
(-) Can be tricky to fulfill at scale
Custom reward incentives offer something outside the bounds of a sale. For example, mattress brand Leesa offers advocates either a $50 cash reward or $50 donated to a charity of their choice. That’s a feel-good reward that transcends the dollar value of a transaction.
A good question to ask is “What are some rewards that only my brand can offer?”
Toddler sleep toy brand Riff Raff & Co offers a hefty referral reward: after 5 successful referrals, you receive a new Riff Raff and Co toy for free. For parents of small children, a spare toy can be handy as a backup, or a perfect gift for a friend.
Once again, the referral rewards also serve as a nice conversation starter: Where did you get that free toy? Which charity did you donate your reward to? These help to boost your word-of-mouth.
With custom rewards, you need to be careful about fulfillment. If 2% of all your customers completed a referral tomorrow, would you be able to fulfill all the custom rewards? Tesla offered a Roadster as a custom referral reward and had massive trouble fulfilling their rewards.
Once you’ve selected your reward type, you want to be sure to present your incentives in the best light.
Step 3: Showcase your referral incentives with good copy
Good copy makes your incentives look more alluring. Here are four quick copywriting ideas to showcase your referral incentives in the best light.
Use the ‘Rule of 100’ to make your discounts look bigger
When you’re writing discounts, should you write in terms of the dollar value or the percentage discount?
The Rule of 100 says that if your product costs less than $100, you should write discounts in percentage terms; otherwise, you should write in absolute terms. Here’s an example:
- For a $25 product, say 40% off instead of $10 off.
- For a $2500 product, say $1000 off instead of 40% off.
In both cases, the value of the discount is the same, but we pick the number that looks bigger. For the $25 product, “40% off” looks more impressive than “$10 off”, and for the $2500 product, “$1000 off” looks like a bigger discount than “40% off”. When offering discounts, use the bigger-looking number.
Tesla’s friend offer is a great example of the Rule of 100: you get $1000 off the price of a new car! A thousand dollars seems like a lot, but not when you consider it’s only a 1.4% discount for their $70,000 car.
A Box of Stories runs a Give £4, Get £4 referral program. The price of a subscription box is £15, so if we apply the Rule of 100, they could also frame it as a 26% discount.
Instead, they were using a different copy trick: Give X, Get X.
Make it sharp and snappy: “Give X, Get X”
The most common referral program follows this formula of Give X, Get X.
If you try Googling ‘Give 10, Get 10’, you’re likely to find plenty of refer-a-friend programs. It works because it’s easy to understand.
Make it about the social experience
Threadbeast’s referral copy is all about the sharing experience - “make your friends love you”.
Meanwhile, Flat Tummy Tea makes customers feel special by turning them into ambassadors - and who wouldn’t want to give away $10 in babe bucks?
Make it about the reward
I love this clean execution from Cycleboard, highlighting the value of the reward:
This is also another example of the Rule of 100: $100 looks like a more attractive offer than 5% off a $1,899 Cycleboard.
Step 4: Customize your referral incentives with some advanced ideas
These first three steps will cover 90% of referral programs. You may have a specific idea in mind, or a particular use case, so here are some successful variations we’ve seen.
Set conditions for redeeming the referral reward
If you offer cash as a referral reward, you may want to set a minimum purchase amount to avoid giving away more than you receive.
You may also want to set up terms and conditions for your referral program, to avoid abuse. Ledger prohibits the sharing of referral links on coupon websites or Reddit forums. Advocates who try to do so will be barred from receiving their advocate rewards.
Give the referral reward after a number of successful referrals
You may also notice that Ledger only awards the $25 discount after four successful referrals. This is another way to adjust the ROI of the program.
Similarly, to earn the free toy from Riff Raff & Co, you need to make five successful referrals.
Use time-limited rewards to run a seasonal campaign
Love Yourself experimented with increasing the referral incentives for a month, to boost the referral rate as part of a summer campaign. It worked, generating 20,000 and 14% more customers in the referral program.
Offer points, contest entries, and other ideas
Awarding points as a referral reward is closer to a customer loyalty/customer retention strategy. It’s extremely popular in the beauty and grooming industry and might be modeled on Sephora’s successful Beauty Insider program.
For beauty brand Frank Body, points are integrated into your customer account. You earn points for making a purchase, sharing on social media, or referring a friend. The more points you accumulate, the higher tier of rewards you achieve.
A points system has worked well for many brands - if your goal is to drive brand retention and customer loyalty.
But if the goal for your referral program is to acquire new customers, we have found that simple and clear rewards work best. Our customers have told us that a points system can be too complicated for their customers, which in turn deters them from referring their friends.
Offer a lopsided or one-sided referral program
While Give X, Get X is a successful formula, sometimes you may want to offer a lopsided referral program.
A 2007 research study looked into this: whether it was better to give all $50 to the advocate (“Reward Me”) or to split the incentives between the advocate and referred friend (“Reward Both”). They tested the likelihood of referring with two brands, a stronger brand (53% market share) and a weaker brand (15% market share).
Reward Both was a Give $25, Get $25 program; Reward Me only rewarded the advocate with $50
The takeaways from the research were:
- Referral incentives increase the likelihood of making a referral
- Weaker brands got more out of rewarding their existing customers
- Stronger brands were more likely to get a referral regardless
If you have a newer brand or one that’s less well known in the market, you may want to offer existing customers a bigger reward - this can reinforce their connection to the brand and motivate them to make a referral.
This is similar to how Gymshark kickstarted its Gymshark athletes' program, and in fact, one-sided referral incentives closely resemble affiliate marketing programs. Using a referral link from Gymshark gives you no benefit, but earns the referrer a small commission.
What next, after deciding your referral incentives?
Once you’ve set up your referral incentives, you’re ready to start promoting your referral program. Here are some suggestions for what to do next:
- Take inspiration from other Shopify brands running referral programs
- Promote your referral program, and let existing & new customers know about it
- Keep an eye on the ROI of your referral program, and optimize it for better results
- Address referral fraud, if some people try to abuse your referral program
- The ultimate guide to referral programs with lots of examples for your inspiration
And of course, be sure to sign up for our email newsletter to get the latest articles and round-ups to grow your ecommerce store.
The previous version of this article was written by Visakan Veerasamy, a former marketer at ReferralCandy. We updated this article to keep it relevant and useful to ecommerce merchants.