Set Up a Referral Program For Small Business: Step-by-Step Guide

Small businesses typically grow on personal connections and community trust. Therefore, a referral program for small business may be a game changer. It bring in customer to the new business, as 82% of small businesses report that referrals are their primary source of new customers.

By using the power of word-of-mouth using a referral system, small businesses can accelerate growth and build a loyal customer base. Let’s learn all about how to build one!

What is a referral programs

A referral program is a marketing strategy that encourages existing customers to refer new customers to a business in exchange for rewards. These programs leverage word-of-mouth marketing, which is one of the most trusted forms of advertising – studies show that 92% of consumers trust recommendations from friends and family over any other form of advertising.

One of the most famous examples of a referral programs that work is Dropbox. The company offered users 500MB of free storage for every friend they referred, with the referred friend also receiving the same bonus. This referral system helped Dropbox grow its user base by 3,900% within 15 months without spending heavily on traditional advertising.

Similarly, many small businesses implement referral programs with simple incentives like discounts, store credit, cashback, or free products to encourage loyal customers to spread the word. The key is to create an appealing and easy-to-use referral system that benefits both the referrer and the new customer.

Simple referral program flow for startups

For startups, a great referral program should be simple, automatic and effective. Here’s how it works in five steps:

1. Customer Gets a Referral Link: After purchase, customers receive a unique referral link or code (e.g., Shopify apps like BixGrow auto-generate these).
2. Customer Shares the Link; They share it via email, social media, or messaging apps like WhatsApp.
3. Friend Makes a Purchase: The friend uses the link or code to get a reward (e.g., discounts, store credit).
4. Referral is Tracked: Referral marketing software track referrals automatically, or businesses can verify them manually.
5. Both Get Rewards: Common incentives include discounts (“Give $10, Get $10”), store credit, or cash rewards.

By following this five-step referral flow, startups can build a cost-effective and scalable word-of-mouth marketing strategy that attracts new customers organically. PayPal uses a similar referral flow, offering $20 for every new referred user. This led to 7–10% daily growth and helped PayPal gain 100 million users in just a few years.

How to set up a referral program for small businesses

Launching a referral program for a small business is easier than you think. With the right structure in place, you can create a seamless system that encourages customers to refer their friends while rewarding both parties.

1. Pick a Referral Marketing Software

Choosing the right referral marketing software is the first step in setting up your program. Look for a platform that offers:

• Platform compatibility: Works with your existing website or eCommerce platform. For example,
• Customization options: Allows you to set rewards, branding, and messaging to fit your business needs. The next step will give you some guide on referral rewards choosing.

2. Pick a reward that motivates customers

The success of a referral program largely depends on the incentives you offer. You need to choose a reward that is appealing enough to encourage customers to share but also sustainable for your business.

Common types of referral rewards include:

• Discounts: Offering a “Give $10, Get $10” discount is a widely used approach, where both the referrer and the referred customer benefit from a price reduction.
• Store credit: This encourages repeat purchases, boosting customer loyalty while rewarding referrals. Instead of offering cash, you can provide in-store credit (e.g., “Earn $20 store credit for every referral”).
• Cash rewards: Some businesses, particularly those selling high-ticket products, prefer cash incentives. For example, banks and subscription services often offer $50–$100 per successful referral.

There are more than 3 types of incentives, however as we try to keep it simple, sticking around these 03 may keep your hand hassle free.

Beyond standard rewards, businesses can make their program more engaging with advanced reward structures:

• Tiered rewards: This method encourages multiple referrals by increasing the reward for each additional successful referral. For example, refer one friend, get 10% off; refer three friends, get 20% off; refer five friends, get a free product.
• Recurring commissions: If you run a subscription-based business, you can reward referrers with a percentage of the referred friend’s ongoing payments. This is popular among SaaS businesses and membership-based services.

For example, Dropbox’s famous referral program rewarded users with 500MB of free storage per successful referral, with a limit of up to 16GB. This drove massive growth, helping Dropbox gain 4 million users in just 15 months.

3. Create a referral link or code for easy sharing

For a referral program to work effectively, you need a system to generate and track unique referral links or codes. This ensures that referrals are properly credited and rewards are distributed correctly.

Here are the best options depending on your platform:

• For Shopify users: Shopify store owners can use apps like BixGrow or Smile.io, which automatically generate unique referral links for each customer. These tools also track referrals and process rewards seamlessly.
• For non-Shopify users: If your business runs on WooCommerce, Magento, or other platforms, consider using ReferralCandy, which supports multiple eCommerce systems.
• Manual alternative: If you’re running a simple referral program without automation, you can use discount codes like FRIEND10 for tracking referrals manually. However, this method requires regular monitoring of sales reports to ensure accuracy.

4. Promote your referral program to maximize participation

A referral program won’t succeed unless customers know about it. That’s why promotion is key. Here are the best ways to spread the word and encourage participation:

• On Your Website: Make your referral program easy to find by adding a “Refer a Friend” banner on your homepage, a sticky widget that follows users as they browse, or a dedicated page in your site menu.
• Via Email & SMS: Send out targeted email and SMS campaigns reminding customers about the program. For example, after a successful purchase, you can send an email saying, “Loved your order? Invite a friend and get $10 off your next purchase!”
• On Social Media: Leverage platforms like Instagram, TikTok, and Facebook to promote your referral program. Encourage customers to share their referral links via Instagram stories or TikTok challenges. You can also partner with micro-influencers to boost visibility.

For example, HelloFresh’s referral program is widely promoted through email campaigns and social media ads, encouraging customers to share their unique referral links with friends. By integrating referral promotion into their customer touchpoints, they have successfully acquired millions of new customers.

5. Track & reward participants efficiently

The final step in setting up a small business referral program is ensuring accurate tracking and timely reward distribution. This step is crucial to maintaining trust and encouraging continued participation.

• Automated tracking: Shopify users can use apps like BixGrow, or ReferralCandy to automate tracking and payouts. These tools record referrals in real-time, ensuring referrers get rewarded promptly.
• Manual tracking: If you’re running a simple program with discount codes, you’ll need to regularly review sales reports to track referral activity. A common practice is to check referral sales weekly and email discount codes to successful referrers.

Whether you choose a discount-based reward or a tiered incentive system, the key to success lies in making the referral process seamless and actively promoting the program. With the right tools in place, referral programs can become a powerful engine for sustainable customer growth.

Advanced referral program strategies for growth

While a basic referral system for businesses can acquire new customers, more advanced strategies can further optimize results and drive long-term growth. After establishing a successful referral system, businesses can experiment with additional tactics to enhance engagement and retention. 

1. Loyalty & Referral hybrid programs

Combining a loyalty program with a referral system allows businesses to encourage both repeat purchases and customer advocacy. Instead of just offering one-time referral rewards, customers can earn points for referrals, which they can redeem for future purchases.

For instance, Sephora’s Beauty Insider program allows customers to earn points not just from purchases but also from referring friends. Points can be redeemed for discounts, exclusive products, or VIP experiences.

How to implement:

• Use platforms like Smile.io or BixGrow to integrate loyalty-based referral programs.
• Allow customers to earn both referral bonuses and loyalty points to encourage engagement.
• Offer exclusive perks to customers who reach certain referral milestones.

2. Milestone-based rewards

Instead of offering the same reward for every referral, businesses can incentivize customers to refer multiple friends by introducing milestone-based rewards. The more referrals a customer makes, the greater their rewards.

Morning Brew, a digital media company, uses a tiered referral system where customers unlock better rewards as they refer more friends. A single referral earns them exclusive content, while higher referral counts unlock branded merchandise, VIP events, and even paid partnerships.

How to implement:

• Define reward tiers (e.g., refer 3 friends, get 15% off; refer 5 friends, get a free product).
• Display a progress tracker in customers’ referral dashboards.
• Encourage social sharing by providing pre-written messages for users to share.

3. Recurring commission for ongoing referrals

Some businesses, especially those in the subscription, SaaS, or service-based industries, can benefit from recurring commissions instead of one-time rewards. Instead of a single payout per referral, referrers receive a percentage of the ongoing payments made by their referrals.

Web hosting companies like Bluehost and SaaS brands like ConvertKit offer lifetime commissions on referrals, ensuring that affiliates continue to earn as long as their referrals remain paying customers.

How to implement:

• If you offer subscription-based services, consider rewarding referrers with monthly or annual commissions.
• Clearly outline the commission structure (e.g., 10% recurring commission for 12 months).
• Use referral tracking software like Tapfiliate, BixGrow, or ReferralCandy to manage ongoing payouts.

4. Influencer & UGC-based referral programs

Partnering with influencers and content creators can amplify your referral program’s reach. Rather than only rewarding existing customers, businesses can offer special referral commissions or sponsorships to influencers who introduce their audience to your brand.

Glossier, a beauty brand, turned customers into brand ambassadors by rewarding those who referred friends via Instagram. The brand encouraged user-generated content (UGC) by allowing referrers to share their experiences and tag the brand in their posts.

How to implement:

• Offer influencers and brand ambassadors custom referral links with exclusive perks.
• Encourage customers to share their referral experience on TikTok, Instagram, or YouTube.
• Feature top referrers on your social media pages to build social proof.

Best tools & software to create a referral program

Setting up a referral program manually can be time-consuming, especially when tracking referrals, distributing rewards, and preventing fraud. Fortunately, there are several referral software for small businesses designed to simplify the process. 

Best Shopify referral marketing apps

If you’re running a Shopify store, these apps seamlessly integrate with your site to automate referral tracking and reward distribution.

• BixGrow: A powerful yet beginner-friendly Shopify referral and affiliate app offering customizable rewards, automated payouts, and multi-tier commissions. Shopify-native apps like BixGrow provide a seamless experience with one-click integration, automatic discount creation, and built-in fraud protection.
• Smile.io: Best for combining referral programs with loyalty rewards. Allows customers to earn points for referrals and other interactions.

Best general referral marketing software (works across platforms)

If you’re not on Shopify, or you want a multi-platform solution, consider these tools:

• ReferralCandy: One of the most popular referral apps, working for Shopify, WooCommerce, Magento, BigCommerce, and more. Ideal for e-commerce brands.
• Tapfiliate: Works well for SaaS, subscription-based businesses, and online services. Supports recurring commissions and affiliate tracking.

These tools are platform-agnostic and provide robust analytics, fraud prevention, and flexible reward models.

Best referral software for WooCommerce (WordPress)

WooCommerce store owners can benefit from plugins that seamlessly integrate into their WordPress websites.

• AffiliateWP: A top-rated WooCommerce referral plugin that enables affiliate and referral tracking with easy setup. WooCommerce-specific plugins like AffiliateWP offer deep customization and WordPress-friendly tracking tools.

Best referral software for mobile apps

If your business operates via a mobile app, these tools can help track and reward referrals effectively. Mobile-first businesses need referral tracking that works across devices, and these tools help track conversions from app installs to in-app purchases.

• Branch.io: Best for mobile-first businesses, offering deep linking and referral tracking for app-based referrals.
• AppsFlyer: Provides advanced mobile analytics and referral attribution for businesses running app-based referral programs.

Conclusion

A well-structured referral program can be a game-changer for small businesses, turning satisfied customers into powerful brand advocates. By offering the right rewards, simplifying the referral process, and promoting it effectively, businesses can drive sustainable growth through word-of-mouth marketing. As competition increases, leveraging customer trust and social proof through referrals will become even more important.

With the help of referral program software like BixGrow (for Shopify), ReferralCandy, or Tapfiliate, small businesses can automate tracking, streamline payouts, and scale their referral efforts without the hassle of manual management.