Everything you need to know to build a referral’s feature:

Referral was first introduced to me when my friend asked me to use his code and download the Uber app. I got a free ride back home and so did my friend. This was years ago and the terms “product”, and “growth strategy” hadn’t made headway into my life, let alone the word “referral”. But with so many companies witnessing exponential growth, referral marketing was on the pitch deck of every startup.

Though does this strategy work for everyone?

Referral programs marshal your happy customers into advocates and work well only if you have a product worth sharing. That is imperative. It snowballs the word of mouth that is already happening, though it shouldn’t be mistaken as a silver bullet. It is a favored channel for products that have a high CAC for other acquisition channels and the LTV of a customer is high. You would never see free social apps run referral programs. Referral programs also lose their value as the market matures. A couple of “I already have that” responses are a signal that it doesn't fit into your growth strategy anymore.

Let’s dive into the design considerations of creating a referral program, The who, where what, and how :

Most apps have referrals in the profile section with catchy titles like “Free rides”, “Free stock” etc. Other times you can find them as banners on the homepage. So what is the right place to put it? A growth-focused answer would be to put it in as many places as possible with different messaging to get the most impressions. A product-focused answer would be to not make it intrusive yet should be easy to find and contextual. It shouldn’t look like an ad, but something that blends in with your UI. Ind Money does it well, where they have tiles saying “get a free amazon stock”. It’s eye-catching, intriguing, and blends well with the product offering.

Does a similar dilemma arise about who should you show this to? A growth-focused answer is to show it to all the new users with the rationale of targeting the entire cohort vs a day 30 cohort where the majority of the users would have churned. Another assumption is that new folks may not have a lot of their friends on the platform therefore there is a bigger pool to tap. Product first thinking would be to let users experience the product before we ask for a referral. None of the approaches are right or wrong, it depends on the stage your product is in and learning from a lot of experiments as to what gives you the maximum ROI.

The when doesn’t just have to depend on the user segment or the user flow, it can also depend on external events that influence user behavior. Uber used the concept of “holidizing” a referral campaign. Drivers would love some extra cash in the holiday season or for a major concert in a town. You can run promotions in coordination with some external events that freshen up the campaign.

Now comes the what. Also the most crucial step in the design process.

The first step is to determine whether the reward structure would be one-sided or two-sided. In a one-sided structure, it’s either the referrer or the referee. This works when you have a low budget, a cheap product, or a telesales team who can work with the leads generated or the program doesn’t require you to be a customer to refer. Though higher conversions happen when the rewards are two-sided. Inviter-centric rewards do work better but in settings where altruism is preferred, it could also be the other way around.

Let’s take the most cliched example of Dropbox. The incentive was storage space and not cash. Intrinsic rewards are cost-effective but the users should find real value in them. For example, games give you extra lives, coins, etc so you can continue playing and advance to the next levels. The difficult question is how does a new user find value? This could be the deciding factor in choosing intrinsic or extrinsic reward offerings. Extrinsic rewards don’t always have to be cash, they can also be gifts.

The easiest execution without much thought would be “give ₹100, get ₹100. But as a product person, you should understand how inefficient that is. You can design rewards that are asymmetrically targeted based on user value. If a user brings in 5 referees, they should be eligible for a higher reward when compared to someone who brings in 1. That’s called a tiered reward structure. A multi-step or staged reward system would entail getting different rewards at different stages of the journey. So if the referee buys a 12-month pack vs a 6-month pack, the referrer could get a higher reward for the former. The rewards could also differ based on the amount a referee spends.

The reward structure can also be gamified. Robinhood does this well. There is a free stock for every referral with a certain probability of getting an expensive stock like Apple. There is a Reddit channel to discuss the rewards( ensure there is at least someone who gets it), so every time someone declares they received an Apple stock, it urges more people to keep referring. Referral drawing can help you create a viral campaign. Ultrahuman ran a viral campaign where they were giving out AirPods to referrers and your chances of winning increased if you referred more people. Morning Brew used this concept to grow from 100k subs to 1.5M in 18 months. Both the subscriber and the referee had the chance of winning a MacBook during the contest.  

How does one refer:

It should be very easy for people to refer to. Each user can have a unique referral link that they should be able to copy and paste on different sharing mediums like social, messages, Whatsapp, email, etc. For products that use a telesales channel, the referral page could also ask for the referees' phone numbers and a message can be triggered to them.

A few things to keep in mind while crafting the message:

The referral benefits should be explained clearly with a very clear CTA. The message should also provide a glimpse of the product/brand as the new user may not necessarily know. It should have a personal touch. Airbnb does this well. The message is perceived to be coming from the referee instead of Airbnb making it more compelling.

TLDR Here is a basic structure while designing a referral campaign:

• When do you ask a user to refer?
• Is the campaign tied to a promotion or external event?
• Who is the target segment?
• What is the incentive?

There should always be an ROI metric to determine if the program is working or if the spend is effective. A baseline of CAC/LTV is fundamental but there could be other tradeoffs, like the optimization bandwidth spent could be utilized elsewhere.

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