Refer a friend programs

[Practic]

In the previous post (see [1]) the three necessary conditions for a sale to happen were presented. It was pointed out that traditional advertising and marketing methods target only condition 1, they can not be applied to conditions 2 and 3. Refer a friend programs can be used by some businesses to increase purchasing powers of consumers, keep them loyal, and to grow sales.

A refer a friend program (RFP) is a type of the word of mouth marketing (WOMM), where customers receive financial (or other types of) rewards for referrals.

For example, a customer brings a friend to be a new customer and a company pays to the customer $100. Usually, a value of an award is a number from the interval [AVC+1,CLV-1], where AVC is an average value of awards offered by competitors and CLV is a customer lifetime value.

The most successful application of RFPs in modern times is an example of the Tesla Motors company.

This company, initially, did not use classical marketing and advertisement methods. Instead, it relied completely on a combination of a RFP and communications via social networks as the main marketing strategy.

The result for the company stock price was phenomenal. 29,800% increase (which is over 298 times from around $3 on June 17, 2010 to over $895 on January 26 2021). This performance is a puzzle for all financial analysts.

Many thousands (over 10,000 in Q1 2015) of customers were acquired quickly by the company.

After this successful application of Tesla Motor’s RFP and social networks in a synergistic way, many other companies rushed to copy this success and implemented RFPs. For example, many banks, Uber, DropBox, T-Mobile, etc. have RFPs (see [2]).

Referral marketing is a modern reincarnation of the oldest form of marketing -word of mouth marketing (WOMM). Bundled together with financial (or other types of) rewards and social networks it harnesses powers of synergy and viral distributions and was proved (by companies like Tesla Motor and Uber) is the most cost efficient and powerful marketing tool today. In such type of programs there are no advance payments as in traditional advertisement and marking. Payments (or rewards) are made only, after results are delivered.

For the reason that it is a new and fast growing field, there is no a well established terminology and methodology. Each provider advocates for her/his own approach as the solution to be used. There are overlaps and contradictions in terminology in some cases. For this reason a very careful and detailed analysis should be performed in each particular case.


References:

[1] MARKETING - Three necessary conditions for a sale to happen

[2] The 5 Best Referral Programs in 2023 and What You Can Learn











[2] The 5 Best Referral Programs in 2023 and What You Can Learn

 

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