Loyalty Register glossary
Referral reward
The incentive a program pays when a member refers a new customer, often matched by a welcome reward for the person referred.
A referral reward (also called a referral incentive) is what a business gives an existing member for bringing in a new customer. It is the core of any referral program. The reward can go only to the member who referred (single-sided) or to both the referrer and the new customer (double-sided), in which case the new customer’s share works like a welcome offer.
Updated · By Loyalty Register Editorial TeamRelated terms
What forms can a referral reward take?
Loyalty programs usually pay in points, because points cost the business less than their face value to provide and keep the referrer engaged with the program. Other options are store credit, a discount on the next order, a free product, cash or a donation to a charity. Some programs use tiered rewards, where the reward grows after a member’s third or fifth successful referral.
When should the reward be paid?
Paying when a friend merely signs up invites fake accounts. Most programs pay after the new customer makes a first purchase above a minimum amount, and many wait until the return window has passed so the reward is not paid on an order that is later refunded. A clear waiting period, shown to both parties, avoids complaints. The referrer should be able to see which friends have joined and which rewards are pending.
How do you size a referral reward?
Start from what a new customer is worth and what you pay to acquire one through other channels. A hypothetical program that pays 500 points (worth $5) to the referrer and 200 points (worth $2) to the friend spends $7 per completed referral, plus the cost of any discount on the first order. If that is far below the cost of acquiring a customer through advertising, there may be room to raise it; if referred customers rarely buy a second time, the reward is too generous whatever its size. Points rewards also add to the points liability until they are redeemed.
What should you watch?
Watch for abuse: members referring themselves with new email addresses, rewards shared on coupon sites, and bursts of referrals from one device or address. Set limits per member and check unusual patterns before paying. Disclosure matters too: when members post about your brand to earn a reward, the FTC’s Endorsement Guides say that an unexpected connection with the marketer should be disclosed clearly and conspicuously, and that the same is usually true when the endorser was given something of value. Tell referrers how to mention the reward in their posts. Track the share of referred customers who are still buying after 6 and 12 months, because that, more than the number of referrals, shows whether the reward is buying loyal customers.