Louis Nicholls

Thoughts on startups, web dev and other stuff

Your referral program won’t work. Here’s what to do instead…

When founders start trying to acquire their first customers, they often search for shortcuts.

One of the most common shortcuts founders try is some kind of referral program.

In this post, I’m going to talk about why referral programs almost certainly won’t work for your (early stage) startup, and how you can get most of the results anyway by building bits of a referral program into your sales process instead.


How should a referral program work?

The basic idea behind a referral program is simple:

Your customers likely know other people who would be good customers for your product as well. If those people hear about your product from someone they know and trust, they’re more likely to buy your product than if they heard about it from you directly.

A referral program is your attempt to make these customer-to-person referrals happen as often as possible. Sometimes, this involves incentives. Other times, the incentive is inherent in the product.

In an ideal world, this makes it quicker, easier and cheaper to acquire new customers. It’s obvious then, why so many founders (especially those who don’t like doing sales) hope that a referral program can be their magic growth bullet.

There are three main ways a referral program can work:

  1. The most successful referral programs work when the product is inherently viral. That means when sharing the product is a feature of the product and valuable to the customer. For example if I want to use Whatsapp to talk to friends, I need to share Whatsapp with them first. Very few products are inherently viral. Yours almost definitely isn’t.
  2. If you’ve built a great product which people find valuable or aspirational, you can build a referral program based on word of mouth. This is free, and involves you just making it easy for the customer to share the product with their network. Any startup with a great product can benefit from word of mouth, but it’s a very slow growth channel for most products in the early days.
  3. A third option is an incentivised referral program. This is where you reward either the customer, the person who is referred, or both parties for successful referrals. This can work, but is a) too expensive for most startups without VC backing, and b) often not very effective.

Now that we’ve talked a little bit about what referral programs are, I’m sure you’re still wondering why they probably won’t work in the early days of your startup…


The problem with referral programs

We’ll set aside the inherently viral kind of referral program. Obviously if your product is inherently viral, you’ll know it from day one and can ignore the rest of this post.

For the >99% of you that doesn’t apply to however, let’s have a look at why referral programs are rarely effective in the early days of your startup…

Your product probably isn’t great yet

Very few products are amazing from day one. That takes time and customers using the product and giving you feedback. The simple truth is that your product probably isn’t (yet) good enough for your customers to want to share.

The effort and reward isn’t proportional

This is the big problem for most referral programs.

One reason why founders (and some marketers) love referral programs is that they shift the work and the risk onto the customer.

They require the customer to spend time thinking which of their contacts would be a good fit for your product, and then creating and sharing a message which will convince the contact of that.

What’s more, there’s every chance the contact won’t sign up, and the work will have been for nothing. Also, the customer puts their reputation on the line by sharing your product.

For that level of effort and risk, most referral programs simply don’t offer a big enough reward to incentivise the customer to take part. And as a bootstrapped company or early-stage startup, you almost certainly can’t afford to offer a big enough reward, even if you want to.


How to overcome referral problems…

So how can you use referrals to make lots of sales, faster, even if we know that referral programs rarely work in the early days?

The secret: take the risk and work out of the referral!

How?

By building it into your sales process instead.

Not completely sure what I mean? 

Well, if you’re selling a B2B product, here’s a step by step guide:

Step 1

Work out the best time to ask the customer for a referral. Normally, the best time is after a magic moment (the moment when a customer first sees the value of your product). For example, the first time your software helps them make a new sale. 

If you can’t wait for that, the second best time is right after they become a customer

People who have just taken a big step are likely to take a second, smaller step in the same direction right afterwards. 

Normally, I tend to use both opportunities and ask twice.

Step 2

Now that you know when to ask the customer for a referral, it’s time to plan ahead and do the work for them.

That means going onto LinkedIn, Twitter, Instagram and the customer’s website and putting together a list of potential customers who a) they probably know and b) would be a good fit for your product.

Step 3

Now you just need to de-risk the referral and make it a default ‘yes’ not a default ‘no’. 

You can do this by wording the request for a referral something like this:

Hi {{ Customer First Name }},

Congrats on your first sale via {{ Our Product }}! 

It’s awesome to see that you’re already increasing your revenue with us.

We were doing some product research on how we can help you even more in the future, and stumbled across a few mutual contacts who could benefit from growing their sales with {{ Our Product }} in the same way you are.

I’d love to show them how well you’re doing with our product when I reach out to them. 

Would that be ok? 

If there’s anyone you’d rather I didn’t mention you guys to (or you don’t think would be a good fit), just let me know. 

Thanks,

Louis

{{ List Of Up To Thirty Leads }}


Now this example is in email form, but you can do it in-app or over the phone as well. Generally, the more low key and personal the request is, the more likely they are to accept.

Step 4

Now you have a list of leads you can reach out to with a ‘warm’ recommendation from one of your customers.  

I tend to reach out ‘on behalf’ of the customer. Dropping their name, but obviously being truthful and selling on the value of your product not the reputation of the customer. That’s just a door opener to build trust.

Will they respond as enthusiastically as if the customer had reached out themselves?

Probably not, no.

Will you get a better conversion rate by being able to craft the conversation and handle objections yourself instead of having the poorly motivated, non-expert customer do it for you?

Almost certainly.
 




You can combine these steps with ‘normal’ referral programs as well.

In the early days when you are trying to get your first ~50 customers, this is the kind of trick which will halve the time it takes for a customer to close, and double your conversion rate.

For products where you carry on with a strong direct sales channel (eg B2B SaaS), it can continue to make a big difference indefinitely.


Are you struggling with referrals? Or did you notice a mistake I made? Shoot me your feedback or question to the usual address 🙂

This post is an adapted article from the FiveMinuteFounder newsletter.

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