When it comes to advertising your business, you’re spoilt for choice. From newspapers and magazines to social media platforms and beyond to billboards and bus shelters, promotional potential is massive. Even if your budget isn’t quite so sizeable, there are still plenty of options for you to explore.
Some businesses also use referral incentives as part of their wider marketing strategy, rewarding clients who recommend them.
What are referral incentives?
A referral incentive is something you offer to an existing customer to encourage them to recommend your product or service to their network in exchange for a reward. This strategy turns your existing customers into brand advocates. For example, you might reward them with:
- Cash
- Account credit
- Gift vouchers
- Lower fees
- Money off
- Points in a loyalty scheme
The reward you offer for recommendations depends on the type of referral programme you want to run.
Do referral incentives work?
Recommendations from friends are often touted as one of the most reliable forms of advertising, with many of us allowing this to influence our purchases.
A global marketing study carried out by Radius suggests word-of-mouth is particularly powerful amongst millennials. This group placed word-of-mouth at the top of the list of what influences them when it comes to purchasing apparel, financial products, travel, electronics, and consumer packaged goods.
Is a referral incentive an allowable marketing expense?
Yes, referral incentives do qualify as an allowable expense which you can deduct from your profits before tax.
In short, including allowable expenses on your tax return means you pay less tax. Other allowable marketing expenses might include:
- Website costs, such as development, hosting, and domain name
- Print advertising
- Mail shots
- Free samples
Just be aware that entertainment and hospitality, on the other hand, are not allowable marketing expenses because they’re not business critical.
How to record referral incentives for accounting purposes
You’ll need to document the referral incentives you issue as part of your regular bookkeeping process. Experts at The Accountancy Partnership recommend the best way to do this is by setting up a new expenses category specifically for referral fees.
That way you can clearly see what it costs you (so you can check it’s worth it!), as well as making it easier to claim everything against your tax bill later. It’s just another reason why accountants are so keen on good bookkeeping!
Advice on managing a referral programme
Not sure whether you should be considering running a referral programme to help promote your business? We’ve gathered some of our top tips on how to run a referral campaign efficiently, and successfully.
Set clear goals around what you want to achieve
Are you looking to accelerate business growth? Perhaps you want to supercharge revenue? Maybe you’re searching for ways to improve customer retention? Whatever your goal might be, keep it in mind when you’re thinking about your referral scheme. It might affect what sort of incentive you offer, and who you offer it to. Some people might not offer the sort of brand rep you want!
Regularly report and review progress
Like any aspect of running a business, it’s essential to take stock of where you’re at on a regular basis, so you can see what’s performing well and what’s not. That way, you can adjust your strategy moving forward.
Setting up some sort of tracking for your referral campaign will show you the progress and success of each referral incentive. There are lots of ways to do this, such as issuing specific people with a discount code which identifies customers they’ve referred, or getting technical with unique referral links or coded URLs on your website.
This sort of tracking will also help you understand what a new customer is worth in comparison to the referral costs you incurred to engage them in the first place.
Involve your accountant in the process
Whenever money coming in or going out is involved, it’s always a good idea to ensure your accountant is involved too. Where referral incentives are concerned, they’ll be able to advise on what kind of reward is affordable and make sure you remain tax-efficient and compliant in the process.
Show your appreciation
Okay, so, a customer might be getting a nice little reward for any recommendations they make but still, it’s polite to show your gratitude for their efforts. Contact your referees to say thank you – it’s a small gesture that will have a big impact.
Are referral incentives the same as affiliate marketing?
It’s easy to see how referrals and affiliate marketing can be confused or used interchangeably because both use incentives to drive new customer engagement. When it comes to strategy and management, the two are quite different.
The main difference is the audience who drives this new engagement. While referral incentives call upon existing customers to entice their friends, family, and contacts to purchase your product or service, affiliate marketing campaigns rely on third-party activity.
This third-party comes in the form of brand advocates who are paid a fee to drum up business for you. Normally, the brand advocate will be recommending your brand to an audience which doesn’t know them in person, but who may be influenced by their opinion.
They’re often paid in commission, which comes from a percentage of each sale they directly motivate. This commission is something that can be agreed upon between you and any affiliate you deploy. Yep, this is how influencers make money!
Although it is a different form of marketing from referral incentives, the fees attached to any affiliate campaign you run will also be classed as an allowable expense.
Find more help in our guides and faqs, or ask a tax question for free!
