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What is a Referral Code? How does a referral system work?

Referral codes are a popular form of marketing strategy, employed by many firms and companies for their referral programs to spread the word about a product. We shall dig in further into this up and coming form of marketing and explain how it works and the reason for its growing popularity among consumers today.

A referral code is a sequence of numbers or alphabets, unique to each referrer. The reason each referrer gets a unique code is to make it easier for the company or firm to track the activity of that code. 

This activity would include how many people the referrer has shared the code with, how many referrals have successfully been carried out with that particular referral code, and so on.

How does a referral system work?

There’s a good chance you’ve already been a part of a referral system given how popular the idea is nowadays, especially with new and upcoming B2C apps and services online. The basic concept involves a particular customer signing up for a service or a product, during which he is provided with a referral code to try and get more people to sign up as well. 

This referral code is often provided with an incentive for both the referrer as well as the referral, which encourages customers to share. A typical example of a referral incentive from the referrer’s perspective would be, “ Refer 10 friends to signup, and you will get a ₹500 Amazon gift voucher “. The incentives work both ways, and the person who signs up using your code could, for example, get a 10% discount on their purchase. Thus both sides of the party are satisfied. 

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Why does this system work?

That’s basically because the main idea treads along primitive methods of marketing — namely word of mouth. Today, we’re surrounded by so many different sources of advertising that we’ve become numb to most of them. 

Studies have shown that most people are likely to buy a particular product if they’ve been told about it by their friends, and they trust a personal suggestion over other sources. This is true since, by nature, we are most likely to trust a recommendation from a friend or relative as there is a personal connection as well.

Also, if you like a particular product, you will most likely recommend it to a friend who you know will have a similar interest or will benefit from that product. Thus aside from selling the product, the company gets the same customer to achieve its target market by inviting other prospective customers.

Add to that, the fact that fulfilling a specific target of referrals gives you incentives as a reward while reaching out to other customers as well makes referral marketing an attractive and cheap option for marketers as well.

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