Toyota's sales fell by almost 10% this spring, even though they spent $4.6 million on marketing.

Tesla, on the other hand, has a $0 marketing budget, and their sales are through the roof. Customers pre-ordered 253,000 cars in the first 36 hours after the Model 3 was released. That's a total of $10 billion, even though the cars won't be released until late 2017. What gives?

First and foremost, Tesla has been incredibly successful because they created a distinctive product that people love. Their cars stand out from the rest of the overcrowded car market because they are luxury-line and totally electric.

Tesla has also been successful because of its adept referral program, which generates over 40x ROI.

Referrals are not a new concept. In fact, word-of-mouth marketing is among the oldest kinds of marketing around. Using it exclusively to market a major purchase (like a car) is unprecedented.

Here's how Tesla's doing it.

Incentivize Advocates With Awesome Rewards

Tesla is building an army of loyal customers as it perfects its product.

Their drivers suggest that the cars feel like a new, more advanced breed of vehicle. On online forums, customers rave about how the engine is so quiet, and how the car is safe--in fact, the Model S is the safest car in history. Most of all, these drivers listed having a positive environmental impact as one of the top five reasons they chose Tesla over other luxury car brands.

Tesla's referral system works because they have a fantastic product, as well as infrastructure that makes it easy (and cheap) to refer new clients and reward existing ones.

Tesla's process for referring new clients isn't unique. They generate referral codes using the names of Tesla owners who want part in the program. Starbucks and other large companies also do this, via Extole.This enables new customers to enter (and remember) their referral code faster, and loyal customers can redeem their rewards sooner.

When Tesla owners refer their friends, they get:

Prizes for a few referrals might just be swag, but the items for five and more referrals are exciting for customers who already love the brand. Offering a scalable rewards system keeps the company on their advocates' minds, and encourages them to talk with their friends about how much they love and would recommend their experience with the company.

Tesla's referral program has helped the company put its money where its mouth is. It doesn't just encourage referrers--it rewards them, and makes otherwise typical word-of-mouth marketing actionable. The costs of the rewards items themselves are easily overshadowed by all the revenue that referred customers bring. Case in point: last year, one Tesla owner referred 188 new customers, and generated around $16 million for the company in two months. That customer won a P90D Ludicrous Edition Model S.

As Tesla knows, rewarding your happy customers encourages them to stay loyal to your brand. Maintaining that loyalty is way more powerful than any salesperson at a dealership.

Rewarding New Customers Comes Cheaper

When referred by a friend, new customers get $1,000 towards their new Model S or Model X. That is minimal, considering 77% of Tesla customers have an annual income of over $100,000. And for prospects who were priced out before, the average Tesla price tag is still around $70,000. Getting $1,000 back, even with a combination of federal and state incentives isn't exactly a game-changing perk.

The real reward for new buyers isn't immediately quantifiable--but it's still legitimate.
Clients are spared the awkwardness and ulterior, profit-driven motives of the "middle-man" (i.e. car dealerships) when they buy a Tesla. They also save time, because it's easier to buy a Tesla than it is to haggle with a car salesperson. Instead, there are set prices for each product, so new customers can follow the steps online to complete their purchase.

Tesla knows that because their product is exceptional, their clients will stay loyal and recommend the brand to others. When those customers eventually refer their friends, they'll perpetuate the cycle of bringing new buyers into their own referral circle.

Think Long-Term

Your referral program will only work if you have a great product to begin with. Your customers should be excited to channel their love for your product into their desire to share their great experience with others.

Tesla doesn't need a marketing budget because their customers want to share their experience--especially if they will be rewarded for it. It's great for the company in the long-run too, since referred customers become great customers: they have a 25% higher lifetime value, are 18% less likely to churn, and are more likely to refer their friends.

If you transform your current marketing budget into one that specializes mostly on referrals, your returns on investment will go above and beyond.

Published on: Sep 22, 2016