The Gifts of a Good Referral

by | Aug 29, 2014

According to David O’Sacks, the original CEO and founder of PayPal, when it came to gaining referrals in the meager beginnings of the company, the best initial strategy they had was to pay their clients for their friends.

It all started in the early 2000s, when social media was just starting to take its initial baby steps. Despite the overall “smallness” of social media at the time, PayPal’s strategy of paying people and companies for their referrals was enormously successful. Before long, they were amassing 7-10% daily growth, and their user base was growing to be over 100 million users.

All users had to do was enter in their credit card number, and with every referral made, money was added to their account. Sure, this investment was an enormous cost to PayPal, but if there’s one lesson to be taken from their model, it’s that the pursuit of success can be risky, but if it works out, the financial reward is enormous.

Under this referral policy, in March of 2000, the company had 1 million users, but by summer, they had 5 million. Over time, the bonuses were phased out, until eventually, they were gone altogether. Today, PayPal’s enormous customer base is powerful enough to bring in more customers, and other companies are still looking at PayPal’s model for achieving success (just look at the beginnings of Dropbox).

When it comes to getting new business, cost is always going to be a factor.

Cost for advertising, cost for welcome packets, cost for any number of expenses. But when it comes to gaining those referrals, the benefits reaped far outweigh the costs, because the positive referral of a friend has a far greater impact than any billboard or ad in the mail.

With those thoughts in mind, however, it’s important to look at where your referrals are coming from.

Realistically, you have absolutely no control over when a friend of a client is going to ask your client for a recommendation (that recommendation hopefully being you). That being said, there is one thing you can influence, and that’s how often your referral sources think about referring your business. Sure, you may not have 47 different programs, as listed on, but a few of the general ones will probably work just fine.

Here are our suggestions for managing the top four types of referrals:

1. Direct Referrals

The PayPal story above is an example of a direct referral. “Refer your friends and we’ll put $5 back on your credit or debit card.”

A direct referral is simply that: it’s making an offer to your existing clients, and then rewarding them for sending their friends your way.

Companies have been achieving success with this method for years. From World of Warcraft’s “free game” deal every time you refer a buddy, to giving people additional space and/or premium membership on Evernote, encouraging your current customer base to reach out to their friends is the best method for gaining those referrals.

2. Implied Referrals

If you’ve ever driven around a few neighborhoods during the summer and seen those signs out in the front, “Painted by….” or “Security by…” you know the meaning of an Implied Referral.

Rather than asking for a referral outright, an implied referral program is one in which you do the work for the client, by passing information on to other potential clients and saying, “Hey, if you want to see the quality of my work for yourself, check out the job I did for…” It can mean sending out fliers in the mail to your client’s neighbors, or asking if you can post a sign in their yard for a few weeks.

It may not be the most effective method if you’re a dentist (your patients can’t exactly walk around town with a sign around their neck, reading, “Teeth by Dr. White”), but for businesses like graphic design, technology, or home lighting, implied referrals are pretty powerful.

3. Tangible Referrals

People like prizes they can see and touch. Sure, $5 automatically installed into their bank accounts might be nice, but how great is it to receive a physical gift card or a fresh bouquet of flowers? Plus, if you can give a client a $100 gift card to a nice restaurant, they can take their referral, and then everyone’s happy!

4. Community Referrals

Giving back goes surprisingly well with gaining new clients. There are many organizations that deserve your support, and their causes will often resonate not only with you but with your clients as well.

Sure, a $100 gift card may be the perfect incentive for some, but others find greater reward in impacting their communities. You can make that desire easy by offering to donate proceeds from your clients referral to a charity you both support. Better yet, partner up with an organization with a great cause, so that when you make those referral donations, they’re more inclined to do their own referring for you.

Gaining referrals isn’t an entirely selfish act, particularly when you can offer something in return. They say you can catch more bees with honey than you can with vinegar, and that’s certainly true for those referrals. Offer your clients an incentive they’ll love, and you’ll see your profits soar!

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