Both you and your friend enjoyyour mealss. You order the wok-style sirloin with vegetables served over crispy fries and he orders the wok-style surf and turf over pasta. If you’re thinking this place sounds like Asian-Mexican-American fusion, that is correct. As you pay and leave satisfied, you think ‘what don’t they do here?’

The next day, you and a different friend try for a different Asian, equally new restaurant. Sadly, they’re closed. You recommend (wok in mind) the place from last night, telling this friend about how nice it was. You manage to sit at the exact same terrace-top table. It’s beef dumplings to start, then you order what your friend ordered last night. Your friend opts for the wok-style chorizo rice with basil.

“How is it?” you ask between bites of shrimp and grilled pasta.

“It’s…OK,” he replies.

That’s not an endorsement coming from this friend, who’s a bit of foodie. Meanwhile, you’re happily munching away. After settling up and you’re walking out, the passing restaurant owner asks your friend:

“How was it?”

“It was OK,” repeats your friend.

Thing is, after your friend’s assessment, you’re not sure you’ll go back. You’d been keen to share your first-time experience with him, but now … well, maybe this place isn’t a go-to after all. Before his input, it was all positive. Now it’s become ambivalent. You haven’t been back since.

This phenomenon, which I recently lived and perhaps you have too, perfectly illustrates the power of referrals on our consumer experiences. It shows how social influence from peers affects our perceptions of products or services, even those we’ve previously enjoyed. Truth is, we all deeply value our friend’s opinions and tend to shape our behavior around them.

This post will show you how to create an effective referral marketing strategy. Step-by-step we’ll walk through how to structure, design, and promote a referral program that will earn your brand positive engagement and leverage customer advocacy to drive revenues. First, we’ll outline the benefits of referral marketing. Then we’ll look how referral programs and referral program software are used by leading consumer brands to power their customer loyalty strategies forward.

After this 11 minute read, you’ll have every piece of strategy need to craft a referral program for your brand that’s optimized for customers experience and effective at driving results.

What is a referral marketing strategy?

“Referral marketing is the science of converting a customer’s social capital into a brand’s economic capital. “ — Harvard Business Review

Referral marketing strategies are a comprehensive set of processes that encourage consumer advocacy with incentives to drive revenue growth. They’re also the only marketing channel that allows your brand to leverage word-of-mouth advocacy in a measurable way.

As a marketing channel, referral strategies sustain and promote meaningful customer experiences that are the backbone of marketing 2.0. This emphasis on happy customers is smart marketing: referral customers have a 16 percent higher lifetime value than non-referred customers, according to Wharton. Plus, they love your brand too.

Your customers will talk. As social creatures, sharing is part of our character. A study from Texas Tech University confirms this: 83 percent of users are likely to share a product or service after a good experience. Yet only 29 percent  actually do. That means that an average of 45 percent of your users who want to say something good about you – they’re just not being given the opportunity in a “happy moment.”

The core benefit of effective referral programs is the ability to consistently engage customer segments around these “happy moments” and create advocacy opportunities at scale. This benefits you by driving new referral sales while simultaneously solidifying customer loyalty and retention.

A recent Heinz report showed that companies with formalized referral programs experienced 86 percent more revenue growth in the last two years, compared to the rest. These companies exemplify how sustainable and effective refer-a-friend programs are at driving brand awareness and creating new sales opportunities from existing customers.

The best part is: crafting a referral program is not complex. The three key components to an effective referral program are structure, design, and promotion. We’re going to talk about each of these processes now – and provide examples of strategic best practices from leading consumer brands that succeed with referral marketing programs.

But first: what is not a referral program? A referral program is not a one-time interaction between a brand and a consumer. Nor is it marketers dangling a carrot in front of consumers, enticing them with “win big” promises. Neither is it affiliate marketing, where 3rd-party sites do the work for your marketing team and you pay them a bounty.

Instead, referral programs are built upon genuinely enthusiastic, customer-get-customer interactions that equally rewards all parties involved. There is a science to making referral marketing programs succeed. Here are the three steps to this strategy.

Craft the program structure

To build an effective referral program, start with the program structure. If we use a restaurant metaphor, this is the chef in the kitchen, selecting ingredients and coordinating a menu that will appeal to consumers.

Take this step to determine the incentives you’ll offer target customers, coordinate an easy to understand referral structure and determine what interactions are necessary to make your referral program succeed. To assist with defining your structure, start by answering three questions:

Who are your best customers?

Outline a program that leverages the enthusiasm of your happiest, highest-spending customers. Why? Because like follows like. This customer segment is most inclined to refer customers who will be satisfied with your offering and spend money similarly. Referral incentives are targeted at a specific group and this is what makes them effective. Target customers to get target customers.

How can we target these customers and what’s the most compelling incentive we can offer?

Draw on your deepest understanding of your customers here. Only appealing offers drive shares, so select a valuable and compelling incentive specifically matched to your best customers. Double-sided rewards that deliver equal benefits to both sender and receiver have been found more effective than single-sided rewards. User altruism and the will to improve their friend’s lives is a fundamental aspect of a compelling incentive.