nuud is on a mission to help combat the effects of climate change and save the planet, one armpit at a time. That might sound strange, but they make a clean, effective alternative to regular deodorant with no canisters, no vague chemical ingredients and no animal testing.
To reach those audacious goals, the team at nuud built a loyalty program with an embedded referral program that rewards customers for recommending friends and family.
The nuud website uses onsite prompts to tease customers with free products and discounts for referring others, alongside social media and email promotion for the program.
So how has it performed? nuud’s program members spend 153% more than regular customers, returning to the store to use reward points on larger purchases.
nuud’s success isn’t an isolated case, and it comes against a tough backdrop for acquisition. Back in 2022, SimplicityDX found that customer acquisition costs had risen 222% over eight years, and paid advertising has only become more competitive since.
In this guide, we’ll cover the benefits and disadvantages of referral programs, answer whether referral programs actually work, and show you how to build one for your Shopify store, with examples of brands doing it well.
First, here’s how we define a referral program:
A referral program is a system that rewards your customers for recommending your brand to friends and family.
Customers receive a unique referral link, which they share via SMS, social media, WhatsApp or email. The referrer, the referred friend, or both, claim a reward once the new customer meets the terms of the referral, such as making a first purchase.
Here’s a quick summary before we go into each one in detail:
| Benefits of referral programs | Disadvantages of referral programs |
|---|---|
| Lower-cost customer acquisition | Rewards can eat into profit margins |
| Stronger brand loyalty | Potential for misuse and fraud |
| More sales and revenue | Over-reliance on one acquisition channel |
| Higher customer lifetime value | |
| A community around your brand |
With acquisition costs rising, you need every cost-effective channel you can get. A referral program brings in new customers without paying for ads, and those customers are more likely to convert: over half of customers trust recommendations from friends or partners more than any other form of advertising.
According to PwC, 52% of customers show their loyalty by recommending a brand to family and friends. Happy customers already talk about you, in passing or on social media. Rewarding that behavior is what turns them into active brand advocates.
Every referred customer who converts is revenue you wouldn’t otherwise have. Tracking referral sales also gives you useful insight: Ofra Cosmetics, for example, generated an additional $183k in revenue from its referral program.
Referred customers tend to share the interests and tastes of the person who referred them, so they’re more likely to stick around than someone who found you by chance. Research published by the American Marketing Association found that the lifetime value of a referred customer is 16–25% higher than that of a non-referred customer.
Word-of-mouth recommendations spread and build a community of customers engaging with your brand. Julian Patrick, CEO of Stovefitter’s Warehouse, a wood-burning stove specialist, says this about his referral program:
“This [referral program] not only brought us new customers, but it also made our business look better in the eyes of the public. Our reputation got stronger, and we became known for more than just selling high-quality wood stoves. We were also known for giving our customers the best experiences possible.”
Set up carelessly, referral rewards can eat into your margins. Katie Devoe, Owner and Co-Founder of CBD Nationwide, faced this and found a clever solution:
“Striking a balance with referral incentives was another puzzle. We wanted to reward referrals without slashing our profit margins. Our solution offered exclusive early access to new products or priority customer support, adding value without financial strain.”
Ilia Mundut, Founder and CEO of HeftyBerry, highlighted misuse as a risk:
“Some referral programs can be susceptible to abuse or fraud if not properly managed. Implement safeguards and monitor referrals to prevent misuse.”
The good news is that fraud is very manageable. We cover the safeguards below.
Ilia also flagged this one:
“Relying solely on referrals for customer acquisition might limit the diversity of your customer base. It’s crucial to have a well-rounded marketing strategy.”
So while the benefits are real, keep other acquisition and retention channels running. Paid ads still have a place, and a referral program works best as part of a broader loyalty marketing strategy.
Yes, when the offer is right and the program is promoted well. The evidence comes from both research and results:
Where referral programs fail, it’s usually for one of three reasons: the reward isn’t compelling enough to share, customers don’t know the program exists, or the program is run as a one-off discount rather than part of an ongoing loyalty strategy. The steps below are designed to avoid all three.
A referral program is worth it if you have a base of satisfied repeat customers, a product people like to talk about, and margins that can fund a reward. If you’re still struggling with repeat purchases, fix retention first: referrals amplify loyalty, they don’t create it.
Fraud is the disadvantage merchants worry about most, but a few safeguards handle the vast majority of it:
A dedicated referral program platform builds these checks in, so you don’t have to monitor them manually.
Given how much a referral program can do for your business, here’s how to set one up.
Many business owners start with a simple goal: “make more money.” It’s fine to keep in mind, but the bar is too low, the goalposts aren’t clear, and you can’t measure what works.
“Improve our customer lifetime value by 10% by the end of Q2 to increase overall revenue” is a SMART goal: Specific, Measurable, Attainable, Relevant and Time-bound.
SMART goals give you:
Setting SMART goals aligns your referral program with wider business goals. Our loyalty ROI calculator can help you set realistic targets.
It’s easy to think there’s only one type of referral program, such as “Give $10, get $10.” Behind the scenes, there are two main types: standalone and loyalty-integrated.
A standalone referral program is exactly that: a widget or popups promoting a referral offer, usually a discount code.
The benefit is simplicity. There’s little to design, though you should still test offers to see what performs best.
The downside is that it’s harder to balance rewards against margins, and harder to stand out from competitors.
This approach builds referrals into a wider loyalty program, typically a points-based system where customers earn points and redeem rewards.
The benefit is that rewards are much easier to balance against profit, because you can offer points and non-monetary rewards instead of relying on discounts.
A thoughtfully on-brand loyalty program also builds community. Astrid & Miyu’s program drove over 50,000 sign-ups within nine months and a 40% increase in overall revenue.
The trade-off is more decisions up front. Will you build a simple or tiered program? Will you give it a creative name? How much are your rewards worth, and how will customers earn them?
As the case studies below show, the extra thought pays off.
A simple discount code will convert some customers, but compelling, meaningful rewards have a much more lasting effect on retention and lifetime value.
Consider experiential rewards, such as early access to new products or priority support, alongside financial rewards like earned discounts, within a hybrid loyalty program.
Customer journeys take multiple touchpoints, so promote your program wherever customers are:
Remember those SMART goals? Once your program is live, use your platform’s loyalty analytics to track progress towards them.
Start with a measurement period to set your baseline, then optimize to reach your goals faster.
For example, if referral offers aren’t converting as well as you hoped, or conversions decline over time, run customer research and test new offers to find what resonates.
Here’s more detail on two brands mentioned in this guide: Manuka Doctor and Ofra Cosmetics.
Manuka Doctor faces heavy competition in beauty and personal care, so it built a referral program with a standout offer.
Referred friends get a small discount, and referrers get points to spend in the loyalty program. The program drove a 53% increase in repeat purchases, and 47% of Manuka Doctor’s revenue now comes from loyal customers. Almost 100% of referred friends convert into customers with this offer.
The approach achieves two things beyond revenue:
Ofra Cosmetics, another brand in the competitive beauty space, takes a similar approach:
Ofra offers referred friends a fixed $10 off, and referrers 1,500 points when the friend spends over $20.
The program drove a 59% increase in customer spend, a 56% increase in repeat purchase rate, and an additional $183k in referral revenue.
Both programs increased revenue and retention while minimizing fraud. But notice how the offers differ?
Actionable takeaway: use a referral offer your existing customers genuinely value, tailored to make sense for both your customers and your margins. Ofra likely offers more points with a lower spend threshold because its points rewards carry a lower cash value than Manuka Doctor’s.
As you’ve seen, the main benefits of referral programs are:
The disadvantages to plan for are:
You can address all three by building referrals into a loyalty program rather than running them as a standalone discount.
To learn more about referral strategy, explore the free LoyaltyLion Academy. Or, if you’re ready to build a referral and loyalty program for your store, book a call with one of our loyalty experts.
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