How brands are gaining new customers from referral codes

In a moment of high customer acquisition costs, referral marketing is a stalwart way for some brands to reach new customers. One strategy that’s working for Kizik is a simple coupon code that encourages customers to refer friends in exchange for a discount that they both will receive. Other brands, like Pura fragrances, integrate referrals as a part of their loyalty program where customers can rack up points to redeem for discounts.

Such strategies aren’t new. And when potential customers are bombarded with discount codes and coupons nearly everywhere they look — a Rakuten/Forrester study found that eight out of 10 brands use affiliate marketing — a referral code might not be enough to win them over. Yet for select brands, referral codes are a way to transform loyalty into more revenue; a Wharton School of Business study for a financial services company found referred customers had a 16% higher average lifetime value than non-referred shoppers.

At Kizik, about 20% of its sales come from word of mouth. Around 1% of customers shared a referral code, which sees a conversion rate of 4% to 6%. Swensen, who previously worked at Purple mattress where referral codes were also popular, said it was one of the first strategies he implemented at Kizik when he joined in 2019.

He said the strategy is effective for products with a unique bent — Kiziks have a patented design so they can be slipped on without untying or using your hands. The referral code is sent out as part of a post-purchase email journey, Swenson said, as that is a moment when a customer is highly engaged with the brand.

“There’s excitement in discovering something new. We’re still a relatively new brand but people still find that excitement in discovering a brand or being the first to be able to tell someone, ‘Hey have you heard of Kizik before,’” he said.

And since Kizik doesn’t typically offer promotions, using a coupon code is a way for someone to try out the product in a more affordable way. But Swenson said referral marketing is less about the discount than it is the loyalty earned from both customers in the transaction.

“It’s that idea of someone’s tried it, they loved it and they’re sharing it with you. That social proof moment,” he said.

While Kizik sees steady referral traffic, the strategy isn’t a fit for all brands. Anna Whitman, principal at Coefficient Capital, said that’s largely because of how the marketing world has evolved in the era of affiliate marketing and influencer codes. Initially, referral codes may have been used as a way for a new brand to expand its customer base with a one-to-one relationship. But as influencers and brand ambassadors became commonplace, discount codes began to get swapped and shared around. Referral codes now often show up in Facebook groups or Reddit forums.

“There’s way less of a personal touch and invitation for a referral code, and way more of a price optimization for consumers today,” she said. 

While brand-specific referral codes may be more effective than an ad pushed out to general customers, Whitman said they have lost some of their power with competition from other sources. Rewards platforms like Honey and Rakuten also invite users to share referral codes and receive cash back if their friends sign up. This might seem like a better deal for e-commerce shoppers who prefer the cash to a coupon.

“Ultimately, what referral codes are meant to do is reward existing loyal customers and attract high-value potential customers, but in losing much of the personal touch they’ve lost a good bit of this effectiveness,” she said. 

Brands that stand a better chance of benefitting from referral codes include those with products at a higher price point, Whitman said, or brands that don’t typically offer sales.

One brand that falls into the latter category is Pura, a DTC home fragrance brand. It integrates referrals into its loyalty program where shoppers earn points based on certain actions. One of the most popular methods is referring a friend with a code for a $6 coupon off $50 or more, which gives the customer 240 points for the loyalty program.

The offer generates about 300 referrals per month, though that average goes up during the fall and winter seasons when it’s peak time for home scents. With a 3.2% conversion rate, these generate roughly $70,000 worth of first purchases. 

But the real value lies in how many of those newly-acquired customers turn into fans: about 43% of customers acquired through referrals become repeat customers.  

Gabby Wahlin, pr and brand marketing manager at Pura, said the rewards program is a way to keep loyal fans engaged. Many customers may wind up talking about the brand when they have guests over who are interested in the scent, she said.

“When people come over, the first thing they say is, ‘What is that?’ and right away, you’re like ‘it’s Pura,’” Wahlin said. “They’re already telling their friend sin person, so they’re like ‘I’ll end you an email too.’”