Happy Sunday!
I hope you're having an amazing weekend, outside of the FB spending glitch that some people encountered yesterday. You know what the newsletter means: you should be relaxed on the couch, feet up, AC blasting cool air, weighted blanket over your lap, and a beverage in your hand (maybe a can of BREZ).
Before we get into today's newsletter, I wanted to make sure I plug this past week's episode of Limited Supply. We discussed Klaviyo's IPO path, Attentive's list hostage situation, and off-shore employee setups. You can listen to Limited Supply on Apple, Spotify or YouTube (please subscribe & leave us a review). I'll give away a cup of coffee to the first 250 people to DM me their review's screenshot!
Ok, let's get into today's newsletter...
Today's email is going to be as shiny or sexy as the normal Sunday newsletters. Usually I talk about things that don't require a ton of effort to get up and running, and deliver results quickly. If you're okay with rolling your sleeves up and spending some more time, you might like today's newsletter.
I want to rant about word of mouth and referral marketing. Mainly how it's terrible, examples of good referral programs, why I think it's worth investing into it, and how you can get started. Keep in mind, this is an investment, it's not a channel you can turn on and see results with overnight.
This is something that's just fundamentally broken with DTC brands. Most brands might use one of the common referral marketing softwares and what does it do? Nothing really... it offers someone a $10 store credit to refer someone, and they'll get $10 off too. I'm guilty of it too, look at this Hint setup that hasn't changed in 6 years!
Here's my beef with this... and I'm gonna think this through from the customer standpoint, because that's the only way to be successful at setting up programs like this. Why, as a customer, should I input my email, get a random link and then send that to a friend. Not just any friend, but a friend I was so excited to tell the benefits of the product to, only for them to get... ten dollars?! For most brands, the referral discount is worse than the actual on-site promotion for new customers!
Ok, let's say I did that (because I'm insane)... now for getting a brand a new customer, I get... ten dollars?! That's $10 of gross revenue on both sides, so cut that to $5 of hard costs. You're telling me that I have to jump through hoops like a circus monkey, get a janky URL, remember to send that to a friend, only so they get a worse deal on the product, and I get rewarded with $10? Do you see how this is broken? I mean, this is criminal.
When I think about companies that did this right, there are a few examples:
Uber: They gave people a free ride for inviting someone to the app. If you assume the driver requires 80% of the ride (which was on avg $20), then that's a $16 acquisition cost for new riders.
Buffy: Refer a friend to buy Buffy, get a $50 Amazon gift card. That's a $50 CPA (unless they got a bulk discount on gift cards). And it served a customer need — who doesn't want a free gift card to Amazon? Genius.
HelloFresh: Refer a friend, and they'll get $40 off their first box. Again, the COGS of the $40 box here, is their acquisition cost.
LuluLemon: Lulu has a program just for fitness trainers in communities all over the US. I believe it gives them 10-20% off to shop at Lulu. In turn, it was understood that fitness instructors would wear only LuluLemon when teaching, which naturally encouraged others to want to wear Lulu. Indirect, but good alignment.
Morning Brew: The GOAT of all referral programs. Although, this is fully digital, which means you don't have to fork the cost of COGS, they had one of the best programs. You can read about the full program here (and now Tyler, who built the referral program, has the same one inside Beehiiv)
Word of mouth and referral marketing, in my opinion, go hand in hand. When you're talking about something, you want to be able to give someone a link. Usually, someone would just pull it up, so why not make it easy for someone just to have a discount code or a link that they can use?
For example, when I tell people about Dream, the greatest sleep powder, I just give them my link: nik.co/dream, and it goes to a landing page that took me 4 minutes to setup with Superfilliate (the referral software Beam uses). Now I have no problem using the referral program. Why?
- Beam gives me credit, and it just gets auto-applied to my subscription
- The person I refer gets $20 off
- It's a beautiful and optimized landing page
- The whole process took me about 4 minutes to set up; why wouldn't I do this for a brand I love talking about?
So, why is it worth investing into a good referral program? It's the best form of social proof, although the least scalable too. The "scalable" versions of word of mouth are customer reviews or reviews/editorial articles about your product from publishers like PopSugar or WireCutter.
The TRI Framework
If you judge all 3 of those (referrals, reviews and publishers) by the TRI framework (trust, reach, and impact), here where I think you land on word of mouth:
Trust: Word of mouth is the most trusted source of information for anyone — it's quite literally someone you have a long-standing relationship with, that's giving you the tip. There's a lot of trust that comes when your best friend tells you to try something that could change your life.
Reach: While word of mouth is usually just amongst friends or maybe your friends in the office, if someone has a great experience with you, your chances of going on their social media go up. So reach is limited, and only has a slight chance of getting to their social (which also might be 384 weirdos).
Impact: Word of mouth definitely has a high impact on consumer behavior due just from the trust and emotional connection associated with the referring person. While on-site reviews can influence purchasing decisions, they won't have the same emotional impact.
When should you set up your referral program?
Now. You should have it enabled and ready to be used anytime.
When should a customer set up their referral program?
It should be about a week after their product is delivered that they should get an email or a text to be a part of the referral program. You don't want to push it on them while they're shopping, and also not right after they've made a purchase. You want them to have the proper context; without that, they'll just ignore the message to sign up.
You could take it one step further and wait until you collect a customer review, but that's assuming 100% of customers will leave a review.
What do the numbers say? (LTV, AOV, CVR, discounts)
LTV: From what I've seen, customers who are referred in have a higher overall LTV. The data (from Wharton Business School) also shows this to be true. It makes sense when you think about the loyalty created from a referred customer.
AOV: Similar to LTV, because the recommendation comes from a friend, the AOV is higher. You're not just "sampling" the product when purchasing for the first time, you're already bought in, thanks to the recommendation.
Conversion Rates: Nielsen found that CVR for customers who came in through a referral channel were 4x more likely to convert. To put this into context, if your average website CVR is 3%, your word of mouth traffic comes in at 12% CVR. That's huge.
Discount Usage: I wasn't too sure if this was true, but it checks out. Customers who are referred in care less about using a discount to become a customer. They're a quarter less likely to use a discount code, increasing the margin of it too.
There's almost no reason not to set this up and do it right.
How can you get started building a referral program today?
Here's what I would do:
- Write out a strategy document outlining what's in it for you (the brand), what's in it for the existing customer (the discount), what's in it for the new customer, how you will make it easy for someone to share (either a link, a coupon code, etc.), and how you'll onboard customers.
- Set up the technology stack (you can build it custom or use an app like Superfiliate), and don't overpay.
- Build a quick 2-page deck to give them context on the brand story, product facts, things to highlight, etc.
- Start outreach to customers, and setup flows to onboard them at the right time.
- Reach out to customers to see how the program is going if they've opted-in, and answer any/all questions they have.
- Repeat steps 4 and 5.
Once your referral program is up and running, you need to continue to optimize it. Don't just treat this as a set-it-and-forget-it:
- Regularly analyze referral data to understand which aspects of your program are performing well and which need improvement.
- Experiment with different incentives and rewards to keep existing customers engaged and motivated to continue referring new customers.
- Reach out to customers to see how the program is going, answer questions, and gather feedback. Use their insights to optimize your referral program further.
- Track key metrics, such as referral conversion rates, average order value (AOV), and customer lifetime value (LTV), to measure the effectiveness of your referral program and make necessary adjustments.
Think about some of your favorite brands you've told people about... for me, that's Jolie, Beam, Eight Sleep, Joggy, Warby Parker, and Black Wolf Nation. I should have my own page for all of them, just like my Beam referral page.
Ok... let me know what doesn't make sense or what you would add. I'm curious if I missed anything. On to some fun stuff...
Vendor of the Week:
Particl — Your AI-driven trend identifier and FP&A assistant
Every sophisticated brand, doing over $25M in revenue, has a dedicated human for FP&A (financial planning & analysis) on the finance team, and their job is to predict sell-through, sales, and more. Unfortunately, it's not a prioritized role to hire.
On the bright side, one of Particl's new features is doing exactly this. Particl allows you to predict sell-through based on the data it has from looking at similar companies and categories to you. You can also predict the pricing.
If you combine that with what Particl has been known to do, which is identify trends and sell-through from other merchants, you can now just the platform to understand:
- What products should I sell, based on sales trends?
- How much should I price the products at?
- What is the sell-through for competitors who are doing this?
- What should I expect my sell-through to be when I sell these products?
All of this can be done within Particl, and that's why companies like Rhone, Cuts, Kitsch, ROTHY's, and more use the software on a daily basis.
If you want access to Particl (highly recommended), click here to schedule a quick demo for yourself.
LP of the Week:
Today's LP of the week is a brand that makes me want to inch closer to getting my 9 hours of sleep tonight, Linenbundle.
Linenbundle needed a unique setup for their BYOB (build your own bundle) setup, where we needed to validate people's first step before going to the next step in the shop section.
You can see how the logic is built. On the backend of the site, it's just all custom code. That said, most of our pages (which aren't super custom) are all drag & drop, when built on Unbounce.
If you want us to think through what you could be doing better with your landing pages, or what your landing pages should be in the first place, click here to schedule a call with HOOX.
That's all for this week
I hope today's newsletter, although it felt like the car was driving slower on the right lane of the highway, was still a fun read. Maybe you agree? Maybe you disagree? You can reply either way and let me know (I love seeing the replies come in).
I'll be speaking more on this topic on a webinar with Gina (founder of Stay) and Noah (founder of Social Snowball) later this week. Sign up here to join us!
Tonight is Sunday night, which means it's the reset for the week. I hope you get 9 hours of sleep tonight and feel like Iron Man going into the day tomorrow. It's going to be an awesome week.
Have an immaculate upcoming week, and I'll see you next Sunday to talk all things TV, where to start, how much to invest, where to buy your ads, etc. Can't wait!