What Is Referral Marketing?

Updated: April 29, 2017
by Ray Alexander

The meaning of the term "referral marketing" is broad and vague. It's generally related to a word-of-mouth marketing method via friends and family. Now supposedly "friends" can include your 5,000 social media friends that you don't even know who they are, and your virtual family members if you have any. Traditionally a word-of-mouth marketing is supposed to be effective. It's much more credible and persuasive when you hear a recommendation from someone you know than browsing product reviews to make your own decision to purchase. But many say a product review itself is a form of referral marketing too. So really, what is "referral marketing"?

What Is Referral Marketing?

Shopify defines that referral marketing is where "people purchase products based on someone else's opinion or influence". So basically to get someone else to advertise your products or services rather than yourself or your agents. Shopify also explains that referral marketing includes social media influences, by showing us a YouTube ad example (by DollarShaveClub.com - it's 5 years old now). What it means I assume is that there's always a possibility of your ad post to be referred (i.e. re-shared, retweeted), though it's merely a direct marketing at the point of posting.

But it's pretty confusing, isn't it? Nothing in the world is impossible to 'refer', right? If a video published by yourself could be called an (indirect) referral marketing, anything else could be too - TV commercials, advertising board in a local community, etc. They'll all be referred by someone else at some point in the future.

At least it's good to know that a successful referral marketing should be where a new customer has taken action (e.g. purchased a product or signed up to receive newsletters)​ as a result of recommendation not only by existing customer(s) but any third parties.


Affiliate Referral Marketing

Affiliates promote products on sellers' behalf for a commission. How they promote is entirely up to them; Let's say there's Mr. Affiliate and Miss Affiliate.

Mr. Affiliate​ writes product review in his website. You would perhaps agree that it's one of the most effective method of referral. Particularly a user review - potential customers will feel truly 'referred' when they know Mr. Affiliate has actually tried and tested the product.

Miss Affiliate also promotes products in her website but she simply repeats like a mantra, "Buy this product, it's awesome! Buy it, buy it, it's amazing!" You would probably think "Who's this girl? Does she work there, does she own the product, or just an affiliate?"

Mr. Affiliate and Miss Affiliate are in the same position - trying to get people to purchase products based on their opinion or influence. Would you say all affiliates are in referral marketing?

Affiliates and Agents

Now affiliates vs agents. Advertising agents also work for commissions. Product owners (sellers) also employ them to get better results than to promote themselves. So is there a difference anywhere?

It's either contract of service or contract for services - advertising agents​ often promote products as if they are the seller, pretending to be the seller, in which case they're clearly not giving third party opinions. Whereas affiliates are not allowed to advertise this way - they must disclose their affiliate position in somewhere in their website, usually.

Multi Level Marketing

Multi Level Referral Marketing

Multi-level marketing. Where a scheme offers a referral commission and their "main activity" is in fact secondary - to mask the pyramid plan to stay legal - is often regarded as a referral marketing.

"Hey, how're you doing? How's the weather over there? Good, good. I gotta tell you about this system that I'm working on. Insane amount of money is coming to my PayPal account..."​

When a commission system is on multi-level, they call it MLM. When it's not - you recruit someone and simply receive $50 per person for example - they call the system a referral marketing (instead of calling it a 'single level marketing'!)

Consumer Based Referrals

The definition of 'referral marketing' would be a mess, if you theoretically included any marketing methods that simply 'refer'. However when people discuss the effectiveness of it, they are generally talking about consumer based referrals. Genuine word-of-mouth recommendations. Where professionals are not involved, i.e. consumers may receive small rebates or points by recommending retailers, not as a form of commission.

Dealspotr is ​one of the latest successful word-of-mouth referral marketing platforms, where anyone can spread information about discount offers by any shops from anywhere in the world (though predominantly US retailers).

Statistics / Infographics

"2.68 friends are referred by engaged customers."

This is a stat from an infographic you can find online. Unfortunately it doesn't take a person with average IQ to work out the statement above is incomplete. 2.68 friends out of how many? Over what period?

Referral marketing statistics

I've checked several infographics showing "referral marketing statistics", and unfortunately none of them made perfect sense. I often wonder if the numbers are falsely made up. In fact I assume they're made up if the source of information is not clearly displayed. If not displayed, the numbers are made up and it's ridiculous. If the source is displayed...it's still pretty ridiculous.

"How did you hear about us?" Search engine. Newspaper ad. Word of mouth. Other.

It's vital for retailers to find that out as part of the growth strategy but... I hope you agree that the result should vary from case to case. Type and size of retailers, time of the year. Countries. And when those​ different results are randomly collected over a random period of time in order to make up statistics... You cannot help but suspect that the numbers may be far from accurate.

Full Of Contradictions!

Brands - Referral marketing

Look at the following 3 statements in one infographic that I just saw;

  • 76% of Americans talk about brands in a typical day.
  • An average of 10 brands are mentioned every day, and 70% of brand mentions include a recommendation.
  • ​Positive word of mouth outpaces negative by 6 to 1 ratio.

​All the positives outnumber negatives, telling you that referral marketing is great! That's what you might see in the first instance. But if you closely compare the sentences, you'll soon find them pretty confusing.

About 3/4 of Americans mention brands every day. Coca Cola, Disney, Facebook... Whereas 1/4 of Americans don't, right? The 1st rule of brand is you do not talk about brands. When 1/4 of Americans need to shop, just carry themselves to Walmart and shop blindly, they don't talk about brands.

However 3/4 of Americans who do talk about brands, oh boy, they really do TALK about them - not just one or two brands, but talk about 10 brands every day. And out of 10 brands, 7 of them are their recommendation. Have you cut your finger? Use Band Aid. Is that Band Aid that you have, or any other brand? I'm using Band Aid all the time, I thoroughly recommend it.​

Finally, positive word of mouth outpaces negative by 6 to 1 ratio. Means out of 10 brands that they talk about;

  • 7 brands with positive recommendation.​
  • 1/6 x 7 = 1.17 brands with negative opinion, leaving
  • 1.83 brands with neutral opinion or no indication of preference.

I know the statistics are taken from an average result, but what the statement represents is the impression that's passing to the readers. Do these statistics mean much to you? Not so much. Apart from the fact that you've learned; referral marketing is probably good.

What Is Referral Marketing?

Referral marketing literally is​ a marketing method to get third parties to refer to others. The third parties generally relate to users/consumers in terms of 'word-of-mouth marketing'. But oftentimes professionals such as affiliates are involved in referral marketing. The term can be broad and vague!

About the author 

Ray Alexander

ASD. Recovering alcoholic. LGBTQ+ advocate. Semi-retired. 15+ years of web-designing experience. 10+ years affiliate marketing. Ex-accountant. I'm nice and real. Ask me if you need any help in starting up your home business.

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  1. Ray,

    Good explanation about referral marketing. I appreciate that. Word of mouth marketing may be the most effective way to promote but the scale is too small I guess, when referring to a few of your friends and family. Unless just like you said, if you have thousands & thousands of friends online.

    It’s interesting to know about the mis-presentation of infographics. The creators might be good at designing & drawing but don’t seem to have enough knowledge or information to present correct numbers in the right order.

    Good job, I wish you the best of luck with continuing success with your business, Ray.

    Barry King.

    1. Hi Barry, thanks for your comment, and also thank you for the encouragement! Infographics are meant to be eye-catching, so it’s made up of groups of a short statement and a relevant graphic. We as readers can quite easily be fooled by them and, our eyes would just read on from one to the next without sending a detailed signal to our brain. The sentence “2.68 friends are referred by engaged customers” gives us an impression that every third person is referred, maybe? But that’s not what it says. It’s not just infographics about referral marketing, but I seem to have found a lot of errors particularly in that subject. Which makes me think that a lot of referral marketing worshippers grossly overestimating the effectiveness of it without thinking though…
      Thanks again Barry.

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