Loyalty Register glossary
Referral program
A program that rewards existing customers or members for bringing in new ones, usually once the new customer joins or makes a qualifying purchase.
A referral program rewards existing customers or members for bringing new customers to a business. The member shares a personal link or code, the new customer uses it to join or buy, and once a qualifying condition is met, the program pays a reward to the referrer and often to the new customer as well. Inside a loyalty program, the reward is usually paid in points.
Updated · By Loyalty Register Editorial TeamRelated terms
How does a referral program work?
Most programs follow the same steps. The member gets a unique code or link. The friend signs up or checks out with it. The system records the link between the two accounts and waits for a qualifying event, such as a first purchase above a minimum amount, or a purchase that is not returned within the return window. Only then are the rewards released. Programs also set limits, such as a cap on referrals per member per year, and rules that exclude self-referrals.
Why do loyalty programs run referral programs?
Referred customers arrive with a recommendation from someone they know, which can make them more willing to try the product and to stay. The member who refers is also showing commitment to the brand. A loyalty program already has the pieces a referral program needs: member accounts, a currency to pay rewards in and a way to track purchases.
What does a referred customer really cost?
Referral is a paid acquisition channel. The cost is paid in rewards rather than to an ad platform, and points rewards add to the points liability until they are redeemed. A hypothetical program that pays 500 points to the referrer and 200 to the new customer spends 700 points per completed referral. If only 3 in 10 referred customers buy again, the cost per retained customer is more than three times the cost per referral. Compare that figure, not the headline reward, with the cost of other channels.
How should you measure it?
Track how many referred customers make a second and third purchase, and compare their spend and retention over 6 to 12 months with customers from other channels. Watch for fraud patterns, such as many accounts created from the same device or address, or referrals that cluster just before a bonus ends. A referral program works best when it amplifies a product members already recommend; it cannot create that enthusiasm on its own.