How You Can Use PayPal’s Referral Marketing Strategy to Boost Your Product Launch

How You Can Use PayPal’s Referral Marketing Strategy to Boost Your Product Launch

You cannot talk about referral marketing without talking about how PayPal pulled it off. Back in the days when the internet wasn’t as active, PayPal managed to reach critical mass within just months. The marketing strategy they relied on was remarkably simple – pay people $20 for signing up and $20 for referring a friend.


The strategy was so successful that PayPal acquired 5 million users within its first year (from 1 million users in March 2000).


And that kickstarted the trend of referral marketing. Almost every product company now has referral marketing as part of its offers.

Now all this sounds great – only if you had $60 million like PayPal. Yep. PayPal could only reach critical mass and catapult their user base after spending $60 million.


Does that mean you should just forget about referral marketing? Of course not. That’s where smart marketing comes in! In this quick post we’ll show you how you can reap referral marketing benefits without having to spend millions of dollars.


Ready? Here goes.


What is Referral Marketing? 

Incentivizing people to market your business to their circles in return for a tangible benefit like cash, freebies, discounts, exclusive offers etc.


Why Bother with Referral Marketing?

Because referral marketing is a form of word-of-mouth marketing that is highly successful in making your business go viral. Sure it sounds a tad bit selfish, but it’s a win-win for all. Customer A refers Customer B and Customer B refers Customer C. Everyone gets something.

This is why when referral marketing is done right, it can work wonders – like it did for AirBnB, DropBox, Uber, Hotjar amongst dozens others.


What are the 5 Major Benefits of Referral Marketing?

To keep it short, referral marketing done right can help you with:


a)       Create Brand Awareness Faster

Want to get the word out faster? Referral marketing can help you build brand awareness more rapidly than other marketing tactics. As people share incentives, they are indirectly also promoting your brand.


b)     Reach Critical Mass Faster

Have a target to reach your critical mass audience within a year? Referral marketing can get you there. The catch? You have to really come up with an offer they absolutely can’t refuse.


c)       You’re Winning the Right Customers

People who are signing up to your referrals are also people who are your target customers. They are in the industry. They have a pain that you’re solving & if you incentivize them, they are more than happy to refer you.


d)     Set Up Once Then Sit Back to Enjoy the Benefits

The best thing about referral marketing is you just have to set it up once then everything after that works on automation. All you need to do is get the right offer and messaging, then leave it to your customers to do the work for you.


e).   Get Social Media Love

What could be more rewarding than people talking and sharing about you on social media. Combine referral marketing with your social media marketing & you’re in for long haul success.


Where Referral Marketing Can Go Really Wrong?

Alright, so as exciting as this sounds, you do need to be warned. Referral marketing can make you lose real money if it is not done right. Some major referral marketing problems can be:


a). Not having a measurement mechanism in place:

Even if your referral marketing strategy has kicked off great, it’s still important to constantly monitor progress. Eventually, you would want to lower the Customer Acquisition Cost (CAC) with referral marketing. Paypal went from $20 to $5 to lower CAC. Payoneer only lets you have $20 when your referral has made a $1000 transaction. Without a proper measurement mechanism in place, you’ll burn money & still get nothing.


b). An irrelevant or cheap incentive:

Your referral marketing strategy has to be aligned to your product & your target audience. For instance, Dropbox gave 500MB per referral, up to 16GB. AirBnB gave (the referral program has now ended) $40 off the first day for referrals.

If your referrals are irrelevant or cheap (such as offering 5% over a $300 product), it is least likely to bring in any value.


c). Complicated referral system:

Fill form here, enter code there, click on link here, claim code there. If it’s that complicated, you’re never getting anything out of it.


d). Not marketing your referral marketing program well:

You’ve got the perfect system set up. But nothing’s happening. You’ve probably not marketed it as effectively. Run some social media campaigns. Send out a mass email. Partner with referral networks. Tweet about it. Talk about it. The more you make it popular, the easier it’ll be for your referral program to work.


e). Not implementing a fraud management system:

Referral marketing programs are fraud magnets. Make sure you set up referral rules, have automated checks in place, put limits on referral codes and rewards. Also, it’s better to go for points, credits or discounts instead of cash rewards.


So How Did PayPal Get it Right & What You Can Learn from Them?

It’s easy to be dismissive if we go by the logic that PayPal had $60 million to spend hence the campaign was a success. But to be honest, the money was not the main success factor here. PayPal got some core marketing principles really right to make it a resounding success.


It understood the psyche of its consumers 

PayPal really understood what its customers wanted. Before you start a referral program, don’t opt for the easy way out  – that is offering a basic discount.


Understand your consumer psyche.


  • What do they want?
  • What is their primary motivation to do a certain action?
  • What are they afraid of?
  • What will excite them enough to make the effort of signing up & asking friends to sign up.


Your referral marketing program will only work well if you truly understand the psyche of your consumers.


It focused on growing organically

PayPal was launched in an era when people didn’t use the internet the way we use now, and more importantly, people didn’t even know they could use any other platform for financial transactions other than banks. To make it worse, advertising was expensive.

The team at PayPal knew they had to grow organically – and grow fast. That’s when they decided to use a simple strategy. Reward people with $20 for signing up.

Here’s the ad they put up:

Surprisingly simple. And the rest is history.


It used two-way rewards to pull in more people 

PayPal used two-way rewards in their referral program to overpower these sentiments.

Both parties — Referrer (the person who is inviting) and Referee (the person who is being invited) received a reward of $20 each on successful referral.

Double-way or two-way rewards have been successfully implemented by:


  • Uber —  Refer friends with a referral code and both of you will get referral credit rewards.
  • Dropbox — You and your friend gets 500 MB of bonus space for every referral.
  • Tesla — Each Tesla owner can give friends up to 10 — $1000 discounts
  • Evernote — Invite Friends to Evernote. When they register, install, and sign up to Evernote, they’ll get Premium. You will also earn points to use for Premium.


Note that referral marketing doesn’t have to be just cash rewards or discounts.


You could have different referral programs depending on your growth goals and audience size.


3 Not-so-common Referral Marketing Ideas:

The easy (and dare we say lazy?) referral marketing strategy is to offer a discount. But discounts are old school. And a little boring.

Here are 3 different referral marketing strategies you might want to try.


1️⃣  Incentivize Loyal Customers to Become Referrals 

Don’t just launch an aimless referral campaign. Do it only for people who have already been your customer. To illustrate, take Final Straw’s example. This reusable straw company raised $1,894,878 on Kickstarter by asking their backers to find 5 people in their circle to back the straws for an environmental cause.

The referee gets an extra straw for free!

On the whole, this simple yet effective strategy did not even require additional expenses. You’re motivating existing customers to refer your product/service in return for additional benefits (not necessarily monetary).

Unfortunately, most companies launch referral marketing programs to attract a new audience but fail to reward their existing audience.


2️⃣  Create Exclusive Rewards-based Referrals 

Referrals don’t have to be just about money or discounts. You could have a referral system that rewards your audience.


You can reward them with:


  • A freebie if they refer an X amount of people
  • A unique add-on that’s exclusive only to the referral program
  • A custom experience (like an invite-only event, an exclusive gathering etc)


For instance, Evernote lets you earn 10 points for your first three referrals – enough for three months of Premium or 3 GB of additional monthly upload, then whenever a referred friend buys Premium, earn 5 points.

For most of your audience, rewards in terms of  premium access or freebies are more valuable than cash rewards. Be creative! Referral marketing has plenty of room for creativity.


3️⃣  Enable Commission Based Referrals 

For your top customers you can even create a referral program that lets them earn % of commission for X number of referrals. Furthermore, this works best for service-based or community-based programs where it’s more effective to attract commission-based incentives than discounts or rewards.


To Summarize, Referral Marketing Can Work Only if You Get it Right

If you’re a new business that wants to launch to market, you can do well with a referral marketing program, provided you are able to get it right. Briefly, you must have:


  • An irresistible offer relevant to your audience & industry
  • A measurement mechanism in place to monitor leads
  • A referral marketing program to automate the process
  • Rules that can prevent fraudulent activity & spam for your referral marketing program to be a success.


Feel free to reach out to us for free consultation if you’d like help in launching your product to market with referral marketing strategies.