D2C Brands Should Dedicate More Budget to Building Referrals
March 22, 2020
Fact: direct-to-consumer brands are driving up customer acquisition costs.
Online marketing is the natural path for digital storefronts, who leverage the available data and funnel opportunities to connect with customers. Clearly it works…and there’s the rub: with so many D2C companies vying for available ad space, supply cannot keep up with demand. And when demand increases but supplies stay the same, costs rise.
As the saturation of social advertising causes digital brands to explore alternative forms of marketing, it’s important to remember the basics of good business: provide the best possible consumer experience, and build customer loyalty.
Of course, eCommerce brands will not, and should not, abandon social media advertising. But if you’re looking to fill your prospective pipeline with warm leads and not just cold traffic, it’s time to make a strategic investment in customer referral acquisition.
Loyal, energetic consumers are the most effective way to build brand value
The McKinsey group published a study that taught us two things no business owner should forget:
First, “word of mouth is the primary factor behind 20 to 50 percent of all purchasing decisions.” Equally important, this word of mouth influence is persuasive at all stages of the consumer journey, acting as a “disruptive factor” that inspires a consumer to consider a product or specific brand in ways that advertising messages cannot.
Second, consumers trust the recommendations or experience of their family, friends, and colleagues more than any other source of information. Obvious? Maybe…but this kind of influence isn’t limited to casual social conversation. McKinsey points out that “marketing-induced consumer-to-consumer word of mouth generates more than twice the sales of paid advertising.”
The power of brand-directed referral marketing lives at the confluence of a pair of interrelated facts: 1) Consumers are more committed to using the available online and social media resources to advocate and promote their favorite products and purchase satisfaction 2) All studies on the subject show the same basic truths: referrals work better than broad reach advertising. How much better? Some helpful statistics:
- Referred customers have a 18% higher lifetime value (Journal of Marketing)
- People are 4 times more likely to buy when referred by a friend. (Nielsen)
- Referrals leads convert 30% better than leads generated from other marketing channels (R&G Technologies)
- Customers who are referred are 25% more profitable and are 4-5x more likely to refer new customers (Wharton)
Likewise, a recent study of direct-to-consumer brands confirms that nearly two out of three D2C brands see equal or greater returns from referrals than advertising. In their “The State of D2C Marketing in 2019” report, Yotpo reports that 63% of D2C companies achieve better ROI from their referral programs over digitals ads.
There’s a clear business benefit here: referrals allow brands to set a fixed customer acquisition cost (CAC) versus the volatility of digital advertising. Equally important, brands can balance the referral-based CAC with their long-term customer lifetime value, informing better business decisions and allocating budget appropriately.
Investing in Referral-Based Acquistion
As Growth Partners, XenoPsi works with successful D2C brands through a blend of our Consulting and Marketing disciplines. This work uses iterative processes and builds custom solutions that meet the specific business goals of our client partners.
Our experience has taught us that word of mouth endorsements that convert are no longer a simple act of one-to-one consumer communication. Rather, the most successful D2C businesses build brand-directed referrals that empower satisfied shoppers to generate high-quality sales leads and new customers. By equipping consumers to share messages and their positive experience, businesses are exponentially driving reach exponentially creating the highest possible ROI.
Referral marketing programs jumpstart the shopper’s journey to your product. In marketing, we often talk about “moments of truth.” With brand-directed referrals, your existing advocates share the benefits of your products or services for you, and create more opportunities for moments of truth for those in their network.
To succeed, D2C brands must decipher and close what’s known as “the referral gap.” Texas Tech University reports that while 83% of satisfied customers are willing to refer products and services, only 29% actually do. Translated more simply, this means most businesses are only receiving referrals from one third of the customers who would be happy to give them.
The XenoPsi approach crafts irresistible referral marketing programs through three essential components.
1. Create an unbelievable customer experience. The most successful D2C brands deliver on the promise of a personalized solution that meets consumer need. This encompasses every step across the customer journey from initial consideration through the conversion and the post-purchase experience.
Again and again, we have seen massive returns from optimizing customer experience and digital storefronts. In fact, for smaller companies who need to make the best use of their budget, it might make sense to dedicate less money to ad spend and use those funds to hire staff who can focus on customer experience and connect with consumers through human relationships. In short: Don’t just offer value. Create extra value.
2. Brand-directed referral programs should then focus on building brand intimacy, which will inspire customers to want to help your business. This is not just a connection with the consumer, but empowers your audience to believe that your company deserves a referral.
This worthiness comes to life through balancing financial value (quality product with a fair price) with emotional value. When they provide a referral, customers must believe that they are helping not just their network, but your business itself. They must take ownership of their consumer journey, and that by sharing their positive experience, they are not only helping their friends and family, but are doing a solid for your business, as well. This creates a virtuous cycle where others who learn about your brand want to share what they love about it.
3. Brands must make these messages easy and worthwhile to share.Consumers should be incentivized to stake their reputation on your brand. Implementing a rewards program that ties into referrals is the best place to start. Compared to digital advertising-based CACs, the associated costs are extremely low. There is immense value created when consumers share your brand story for you, and it greatly exceeds the cost of incentive itself.
D2C brands must also equip satisfied customers with messages that capture the attention of their friends and family, and make clear that your business will offer a similar personalized solution to their network as well. The content of an offer must be clear and functional: it should be easy to pass along with a single click, and include scroll-stopping copy and visuals that communicate value to friends and family. Thankfully, this is straightforward to automate and test.
In helping brands build better referral marketing solutions, XenoPsi has come up with a series of store and email optimizations that make sharing referrals easy, as well as developing stronger landing pages for prospects. Contact us if you’d like to learn more.
The likely outcome of investing in referral-based efforts will end up saving on CAC and lifetime customer value. Business leaders know that it’s more expensive to acquire a new customer than retain and grow those you already have. By focusing on a refer-worthy consumer experience, you’re naturally building customer retention. If they’re willing to advocate for your brand in their social circles, they’ll no doubt continue to return for their own needs as well.