The following is a guest post by Aliaksei Karavaichyk. Aliaksei is a marketing and product professional in fintech, with experience across brokerage and banking. He holds an MS in Economics from the University of Illinois Urbana-Champaign.
Every growth leader has the same problem in mind – where do I find an extra volume, keeping acquisition costs below the targeted level? All companies reach maximum volume in the mainstream performance channels sooner or later and get stuck in tedious daily optimizations, competing fiercely for continually diminishing marginal returns on advertising spend.
So where should you go at this point? The answer for many companies is an overlooked referral program. The good news is that you likely have enough users already to roll it out and promote internally to feel the impact. Moreover, a well-oiled referral program can fundamentally change the unit-economics for your user acquisition by increasing the virality variable and decreasing the customer acquisition costs for all cohorts you’ll be getting in the future.
But is there real evidence that referral programs outperform other channels? And what makes the case to finally double down on the efforts in this direction? In this article, I am going to equip you with irresistible arguments.
Referrals is a unique beast that stands aside from other marketing channels – it requires strong collaboration with Product and Engineering. Another differentiator is that it creates a relationship triangle “Company – Referrer – Referee”.
We start with the referee side (the customers being referred). Is there a meaningful difference between referred clients and those acquired through other channels? There is, and we have the empirical evidence. A peer-reviewed study by Schmitt et al. (2011), published in the Journal of Marketing, did a great job analysing referral program effects. Despite the study being somewhat dated, the core ideas are still relevant and anyone who owns the data can repeat it internally.
In this study the authors took a sample of 5,181 referred and 4,633 nonreferred clients of an undisclosed German bank over a period of 33 months and observed such variables as “Daily Contribution Margin”, “Churn”, “Observed Customer Value” and “Customer Lifetime Value”.
The research reveals an increase of approximately 25% in contribution margin for the referred clients in comparison to non-referred. However, in the long run the daily contribution of those two groups converges and the difference disappears after 857 days. The same research shows that at any point in time referred clients are 13–18% less likely to churn, which means better retention. Combining those positive factors together it is obvious that referred customers will have higher lifetime value. Schmitt et al. (2011) estimate this difference in client value at 25%.
This is where the math gets interesting. Unlike ad spend, every dollar you allocate to referral rewards doesn’t leave your ecosystem immediately, it stays within your platform and often recycled back into your product. And on top of that, the acquisition cost can be significantly lower than what you’re currently paying mainstream performance channels. How much less you actually spend depends on your business model (ability to retain funds) and your willingness to pay for the referral to the particular client.
Let’s consider a $300 referral bonus. Unlike $300 spent on Google Ads (where the money leaves your ecosystem entirely), a reward credited to a customer’s account remains within your platform. When you add conditions, such as a 30-day freeze on withdrawals or requirements to use the funds for a certain amount of transactions, that $300 may ultimately become a $150 payout or even less. The same Schmitt et al. (2011) research shows that customer acquisition cost difference contributes 9% of the difference in lifetime value between referred and non-referred clients, while referred clients, as mentioned earlier, are 25% more valuable in total.
Beyond pure economics, we should look at referrals rather from the most important angle – trust formation. For fintech, this matters even more than in most other industries. Financial products are responsible for the safety of a client’s funds, so a recommendation from someone who already uses the service carries far more weight than any paid advertising. HubSpot’s data shows that 81% of customers trust recommendations from family and friends over those from companies.
And now to the Referrer side. The ancient wisdom of “bread giveaways” applies here – you actually can build loyalty by stimulating mutually beneficial behavior. Your most active users are naturally more likely to participate in promotions and this means you’re turning your best customers into your marketing channel. Moreover, high-value customers tend to have other potential high-value customers in their social circle.
We can assume that the financial reward and social aspect of the recommendation naturally leads to higher satisfaction associated with the product. The quantitative metric which must be impacted is referrer retention. The research by Van Den Bulte et al. (2018) shows that in their sample referrers are 2.27 times less likely to churn compared to non-referred customers. However, this does not mean causation, as being an active client is a confounding variable in this case. In other words active clients might more actively participate in referral programs and have lower churn rates for the same reason.
Moreover, Gershon and Jiang (2024) show that referred customers make 31%–57% more referrals than nonreferred customers, as they perceive referring to be more socially appropriate. This finding is based on a large sample of 41.2 million customers observed over 10 years. This fact shows that reinforcement of the referral loop can be achieved when companies make a proper effort to implement and popularise the program among their clients.
To sum everything above, referral programs deserve to be treated not as another side source of traffic, but as a key growth channel for fintechs. They can decrease acquisition costs, bring customers with higher lifetime value and better retention, strengthen trust at the moment of conversion, and reinforce a viral loop as referred users become more likely to refer.
The practical takeaway is simple: if there is a meaningful user base, a well-designed referral program is the next great move to ensure further growth and improve overall unit economics.
