Referral Programs Helped Turn PayPal Into a Multi-Billion Dollar Company. Will They Work for Your Startup?

March 3, 2021 3 min read

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“We gave new customers $10 for joining, and we gave them $10 more every time they referred a friend,” Peter Thiel recalled, in his 2014 book Zero to One, of PayPal’s referral program in its early years. Barely 15 months after he and his team founded the company, in 2000, they were valued at about half a billion dollars, according to WSJ, chiefly because of their breakneck growth at a time when the internet inspired dubiety. Gloriously, its referral program remains a vital part of its growth strategy to this day. 

With 70 percent more conversion coming through referral programs, most businesses just can’t imagine a better engine of growth. In this article, some of the practices that make a referral program a growth strategy rather than a death trap are succinctly discussed.

Related: The Billion-Dollar Time Management Secret

‘Revenue-strap’ referral bonuses

Although they announce modest but attractive referral bonuses, thriving businesses refrain from giving these bonuses to customers until they or their referrals have used their services over a specified period and generated a certain amount in revenue. 

When considering a referral program for the growth of your startup, tie the referee’s access to the bonus to some favorable conditions written clearly (or in fine lines) in your business’s policies. Also, encourage users to read your policy agreements although, according to a Deloitte survey, barely 3% of them ever gets to read it. 

Payoneer Inc. has grown into one of the world’s most renowned payment processor for freelancers and SMEs, partly because of its referral program. However, referees cannot access their $25 referral bonuses until their referrals have processed up to $1,000 on the referred account. Like PayPal, they offer signup bonuses and the same rule applies. 

Bonuses are fractions of the customers’ lifetime value

The average customer’s LTV (Lifetime Value) is the primary factor in determining the signup bonuses. 

I’ve seen several businesses price referral bonuses based on revenue anticipation instead of the factors that determine a customer’s LTV, and most heartbreakingly, some issue these bonuses prematurely. 

With an average transaction volume of $2,334 per user in 2019, PayPal generates up to twice the $40 cost of onboarding new users with its referral program in one year. 

The primary thing to consider when building a growth strategy via a referral system is the value of each customer to your business. This value is tied to transaction volume and the customer’s lifetime value. 

Related: Seven Ways To Make Your Employee Referral Program Successful

Customers are not employees

It’s almost natural for startups to record losses in their earlier years. However, how you spend the business capital will tell if you’re incurring the right losses or saddling your business into oblivion. 

Without dispute, your customers are the most important part of your business. You are allowed to pay employees from the startup funds but it is detrimental to do the same for customers. Instead, create ways to only pay referees from the revenue generated from their involvement with your business. Cash giveaways may be a good growth scheme for influencers on social media but for your startups, sloppy awards of cash in the name of referrals can sink your ship. 

The top priority for a startup founder is to conserve as much capital as possible and only spend when there is no alternative.

Related: The Majority of Small-Business Owners Rely on Word-of-Mouth Rely Referrals: Here’s 3 Ways to Get Them