TwosWrite things down

How to design a referral program by Andrew Chen

🤟 How to design a referral program by Andrew Chen

by Joe · 57 things on Twos

Referral programs — are the “give $5, get $5” offers you see in many apps
They have big advantages in that they give your CAC to your users, who then spend it within your product
They are a form of viral marketing - utilizing your network of users to bring in more users
A successful referral program can be 20-30% of your acquisition mix
It's not a silver bullet, but it's worth adding to complement other marketing efforts
It's said that Julius Caesar would pay his soldiers 300 sestertii to refer a friend to join the army
The most famous early implementation of referral programs came from Dropbox
DropBox's growth trajectory
Referral programs work very well for certain kinds of products, particularly ones that are already spreading via word-of-mouth
In Dropbox's case, there is a natural use case between friends and colleagues - shared folders - which naturally complement the referral channel
Referral programs do not work very well with products that have a low LTV
That's why we don't see free social photo sharing apps reward their users for referrals
There's no LTV to arbitrage against, and the referral amounts create a form of customer acquisition cost
Referral programs also tend to decline in performance over time
They are very helpful at the beginning of a market but then the hope is that the virality of the core product dominates user acquisition
The questions you need to ask for how you structure the program
The Ask:
Product folks often start by agonizing over the ask. They wonder if it's too trivial to create a "Get $5, Give $5" referral program, or if that's too basic.
You can always word smith and test many variations once you have the program up and running
The real question is WHERE do you make the ask?
Ask many times, in many places, with different messages, and in-context with whatever action you're asking the user to take
What you find, after instrumenting all your referral UI, is that there's just a certain conversion rate on this screen
Make the referral ask part of the main flows
After the user is buying something within your app, ask them if they want $X cash back now, by inviting someone
Or if they interact with a friend within in the app, follow up by asking if they want to invite others.
Add it to the onboarding flow and at the end of key transactions when the user is otherwise done and you might as well capture engagement
AND FOR GOD'S SAKE: please don't make it look like "an ad" with big splash text and graphics - make it plain, like something that's part of the normal UI where the user can interact
You can "holidize" a referral campaign by offering extra money towards gifts and festivities, by participating in a referral program
Or run a special tiered campaign where referring 1 friend gets you X but 5 gets you 5*X and a huge bonus on top
There's something great about freshening up the messaging each month to align to major holidays, with new amounts, new imagery, and otherwise
The Target:
The headline best practice is that your referral program should target new users to refer their friends.
This means prompting users during their onboarding flows and adding emails as part of the onboarding.
This is in direct contradiction to folks who often argue to let users experience the product first, have a good experience, before they're hit up to invite.
Why focus on new users?
First, mathematically it's easiest to make a big impact when you are hitting a cohort of 1000 new users when it's as close to 1000 as possible. Not on day 30 when the cohort will have churned and gotten down to 150.
Second, new users generally have more friends who haven't yet used the product, because they are new themselves.
Always do analysis on high-value referrals for particular cities, users, or the types of other apps they use.
The incentive:
You'll note in the original dropbox offer, the incentive itself was storage space, not dollars.
The problem with intrinsic rewards, of course, is that external users (people who have never heard of your product) are the least responsive to points or otherwise.
Dropbox's storage offer is maybe somewhere in the middle since it's at least a concrete form of value
As a result, most referral programs have tended towards dollars over time, but the real goal is to make the inventive as concrete as possible.
Large headline numbers always test much better than initial referrals. Aka tying two things to the referral for a larger incentive.
Which sometimes feel unattainable but you can create lower tiers to go along with the big headline number
Cater to people's self interests when deciding your incentive
The Payback:
You'll need some kind of ROI metric to drive the strategy of the referral program
Are you spending the right amounts? Should you increase the numbers? How much product effort should be put into implementing new surface areas?
If the lifetime value of these users exceeds the cost of acquiring them, shouldn't you go full steam ahead? Well, maybe.
What if you can get much cheaper acquisition via another channel, like TikTok ads. Then any follars that do to this might be better spent on ads.
Occasionally do an on/off test - if you turn off all your referrals for a few days, do you notice a big drop in users? If yes, then your referral program is working. IF not, then you are potentially paying a lot of customer acquisition costs for something that would be happening anyway.
You only need a few "I already have that" responses to stop participating in referrals all together.
For products that have a true network effect, as dropbox does, the acquisition will eventually be taken over by intrinsic use cases like folder sharing rather than something as extrinsic as a referral reward.
"I find myself mostly skeptical when teams approach me asking to build a referral program, the first thing I ask is, are you sure you wouldn't just rather build a viral growth engine?
Truly viral features around sharing and communicating are evergreen and create lasting value.
Referral programs can work, but they will always take a back seat for me, compared to building great viral functionality.