Referral Marketing for Small Businesses: The Promises, The Challenges, The Process

May 04, 2023

Small and Mid-sized Businesses (SMBs) face many challenges when it comes to acquiring new clients, especially in today's competitive marketplace. Traditional marketing methods can be expensive and may not yield the desired results. Referral marketing, on the other hand, can be an effective way to generate new business quickly and cost-effectively. A formal referral program can encourage existing customers to recommend your business to their friends and family, which can result in a significant increase in new clients.

Referral marketing has long been recognized as a cost-effective strategy for acquiring new clients and boosting sales. In fact, studies have shown that referred customers are more likely to make a purchase, have a higher lifetime value, and become loyal customers. SMBs, in particular, can greatly benefit from referral marketing as it offers a cost-effective way to expand their customer base and increase brand awareness. However, creating a formal referral program can pose several challenges.

In this article, we will examine reasons why small and mid-sized businesses should create a formal referral program with the purpose of gaining new clients quickly, along with the challenges involved, and, finally, share a simple process for SMBs to follow when implementing a referral program

The Promise of Benefits...

A formal referral program can be a powerful tool for SMBs looking to attract new clients quickly. Numerous studies show that there are a number of other benefits too, including:

Increased customer acquisition: Referral programs can be an effective way to acquire new customers at a lower cost compared to traditional marketing channels. According to a study by the New York Times, 65% of new business comes from referrals.

Higher conversion rates: Referred customers are more likely to make a purchase compared to non-referred customers. A study by the Wharton School of Business found that referred customers have a 16% higher lifetime value compared to non-referred customers.

Greater customer loyalty: Referred customers are more likely to become loyal customers who make repeat purchases and refer others to your business. According to a study by Nielsen, 84% of consumers say they trust recommendations from people they know.

Improved brand awareness: Referral programs can help increase brand awareness by encouraging customers to share information about your business with their social networks. This can help to expand your reach and attract new customers who may not have heard of your business otherwise.

Cost-effective marketing: Referral programs can be a cost-effective way to promote your business, as they rely on existing customers to refer new ones. This can be especially beneficial for small and mid-sized businesses with limited marketing budgets.

The Challenge of Reality...

Don’t let the promise of great benefits blind you to the challenges that creating a formal referral program can pose for SMBs. While referral programs can be a powerful tool for attracting new clients quickly and growing your SMB, it will require effort and resources to implement and manage effectively. Here are some of the challenges for which you will have to prepare when implementing a referral program:

Incentive Design: One of the biggest challenges of creating a successful referral program is designing an effective incentive structure that motivates customers to refer their friends and family. This requires striking a balance between offering rewards that are valuable enough to be attractive but not so excessive that they hurt profit margins.

Program Promotion: Another challenge businesses may face is promoting the referral program to their customers effectively. Even if a business has designed a great referral program, if customers aren't aware of it, they won't be able to refer new clients.

Tracking and Managing Referrals: Small and mid-sized businesses may also face difficulties in tracking and managing referrals. This requires having a system in place to track referrals and reward customers appropriately, which can be time-consuming and complex.

Maintaining Customer Engagement: Referral programs can lose effectiveness if customers are not engaged or interested in promoting the business. It's important for businesses to continuously engage with their customers and provide them with a positive experience to keep them motivated to refer others.

Competition: Lastly, small and mid-sized businesses may face competition from larger businesses that have more resources to invest in referral programs. It can be challenging for smaller businesses to compete with the incentive offers and marketing budgets of larger companies.

The 'How To' of Implementing...

If, after weighing the benefits against the challenges of establishing a referral program, you decide to move forward, here’s a simple process to follow that can help you set it up quickly:

1.    Determine Your Goals: Start by defining your referral program goals. What do you hope to achieve with your program? Is it to acquire new customers, increase customer loyalty, or something else? Knowing your goals will help you design an effective referral program.

2.    Choose Incentives: Decide on the incentives you'll offer to customers who refer new clients. The incentive should be valuable enough to motivate customers to refer but not so costly that it hurts your profit margins. Common incentives include discounts, cash rewards, or free products/services.

3.    Create program guidelines: Develop clear guidelines for the referral program, including how customers can participate, what they need to do to qualify for the incentives, and any restrictions or limitations.

4.    Create a Landing Page: Build a dedicated landing page on your website where customers can learn more about your referral program and sign up to participate. Make sure the page is easy to navigate and provides clear instructions on how to refer others.

5.    Promote Your Program: Spread the word about your referral program through email marketing, social media, and other channels. Encourage your existing customers to share your program with their network.

6.    Follow Up with Referrals: Once a referral is received, follow up promptly with the new client and thank the referring customer for their referral. This helps to build customer loyalty and keeps customers motivated to refer others in the future.

7.    Track Referrals: Implement a system to track referrals and reward customers who successfully refer new clients. This can be done through a unique referral link, discount code, or other tracking methods.

To sum it all up, small and mid-sized businesses should create a formal referral program with the purpose of gaining new clients quickly. Referral marketing is a cost-effective strategy that can help businesses expand their customer base, increase customer lifetime value, and improve brand awareness. However, creating a formal referral program can pose several challenges, such as the need for time and resources to set up and manage the program, getting customers to participate, and tracking referrals. Despite these challenges, a well-executed referral program can be a powerful tool for small and mid-sized businesses looking to grow their customer base and increase sales.

If you’d like to learn more about how a formal referral program can fit into your SMBs sales process, we’d love to hear from you. You can schedule a complimentary Sales Diagnostic Call with me or one of the experts on my team (we call ourselves ‘Sales Sherpas’).

In this 45-minute, laser-focused, diagnostic, brainstorming session we will share ideas on how you can break through to new levels of sales performance.


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