How to Choose the Best Referral Rewards? (+Examples)

The perfect referral reward depends on your specific business model, customer behavior, and financial metrics. What works brilliantly for one e-commerce store might fall flat for another.

But with so many options available – from cash rewards to loyalty points, store credits to discounts – how do you choose what’s best for your business?

We’ll walk you through a data-driven approach to selecting the most effective referral rewards for your business. We’ll cover:

• What are referral rewards?
• Critical questions to consider before choosing rewards
• Step-by-step process for reward selection
• Common pitfalls to avoid

What are Referral Rewards?

The referral rewards are incentives given to customers who recommend your business to others, and/or to the new customers they bring in.

The popular rewards for referrals are loyalty points, fixed discounts, percentage discounts, store credits, free shipping and free products.

We can broadly categorize these rewards into two types: monetary and non-monetary.

• Monetary Rewards: These are rewards with a direct cash value.
  • Loyalty points convertible to money
  • Store credit/gift cards
  • Cash back
  • Direct discounts (like $10 off)
• Non-Monetary Rewards: These are rewards that don’t have a direct cash value.
  • Free products or services
  • Exclusive access to new items
  • VIP status upgrades
  • Early access to sales

A proper referral program with proper rewards benefits both the business and the customer:

• For the business: Referral programs help acquire new customers through word-of-mouth marketing.
• For the customer: They get rewarded for spreading the word about a product or service they like.

Related: Learn briefly about how to create a referral program in easy to understand steps with examples.

What are the Common Reward Structures?

These are the different ways you can structure your referral rewards.

1. One-sided rewards: Only the existing customer who made the referral gets a reward. How it works:

• Only the referring customer gets the reward
• New customer shops at regular price
• Simple to track and manage

Examples:

• Referrer gets $20 store credit for each new customer
• Referrer earns 1,000 reward points per referral
• Referrer receives a free product after successful referral

2. Two-sided rewards: Both the existing customer and the new customer get a reward. This is more effective and 91.2% of businesses use it. How it works:

• Both referrer and new customer receive benefits
• Can be same or different reward types
• Creates mutual benefit

Examples:

• “Give $10, Get $10” discount program
• Referrer gets points, new customer gets discount
• Both get free shipping on next purchase

3. Tiered rewards: You offer bigger rewards for more referrals. The more friends someone brings, the better the reward. How it works:

• Rewards increase with more successful referrals
• Can have different levels/milestones
• Usually resets periodically

Examples:

• 1st referral: $10
• 3rd referral: $15
• 5th referral: $25 + free shipping
• 10th referral: VIP status upgrade

Related: Checkout best WooCommerce referral plugins if you want to know which plugins work best in ecommerce referral marketing.

Questions You Need to Ask When Choosing Referral Rewards

Here are some notable questions to need to consider when selecting the rewards for your referral program. We have also answered those questions along with examples for your clarification.

Financial Considerations

1. What is your customer acquisition cost (CAC) currently?

To determine appropriate reward value, CAC should be analyzed across all marketing channels. Reward value should typically be lower than your CAC.

Examples:

• If Facebook ads CAC is $30, offering a $20 referral reward still saves $10 per customer
• If Google Ads CAC is $45, a $25 referral reward provides significant savings
• If email marketing CAC is $15, consider a $10-12 reward to maintain profitability

2. How much can you afford to spend per new customer acquisition?

Calculate based on customer lifetime value (CLV) and profit margins. Typically aim for reward cost to be 20-30% of first purchase profit.

Examples:

• If average first purchase profit is $50, consider $10-15 reward
• With 40% profit margin on $100 sale ($40 profit), afford $8-12 reward
• For high-CLV customers ($300+), can justify $25-30 reward investment

3. What’s your profit margin on typical orders?

Analyze margin after all costs (product, shipping, operations) to ensure reward doesn’t eliminate profits.

Examples:

• 45% margin on $100 sale = $45 profit, can offer up to $20 reward
• 30% margin on $80 sale = $24 profit, limit reward to $10
• 60% margin on luxury items ($300 sale = $180 profit) can support $40-50 rewards

4. What’s the break-even point for your reward value?

Calculate minimum purchase value needed to cover reward cost plus maintain minimal profit.

Examples:

• $20 reward with 40% margins needs $50 minimum purchase to break even
• $15 reward with 30% margins requires $50+ purchase to maintain profitability
• $25 reward might need $100 minimum purchase requirement to ensure sustainability

5. How will the reward value affect your unit economics?

Analyze impact on net profit per order and long-term customer value.

Examples:

• $10 reward reducing profit from $30 to $20 but increasing order frequency by 25%
• $15 reward cutting margin by 10% but doubling new customer acquisition and retention rate
• $20 reward leading to 30% larger average cart sizes, offsetting reward cost

Customer Value Assessment

1. What reward value would be compelling enough to motivate sharing?

The reward should be significant enough to drive action but not so high it attracts fraud. Industry studies suggest 10-20% of average order value.

Examples:

• Fashion retailer offering $25 off $100+ purchase (25% reward)
• Beauty brand giving $15 store credit for any referral purchase
• Home goods store providing $50 off $200+ purchase (25% reward)

2. What’s the minimum reward that would make customers take action?

Research shows psychological thresholds that trigger action. Survey data suggests minimum effective values based on industry and price points.

Examples:

• Fashion: Minimum $10 off for items $50+
• Electronics: At least 5% off or $25 for purchases $200+
• Beauty: Minimum $5-8 reward for $30+ purchases

3. Would your customers prefer immediate small rewards or larger delayed rewards?

This depends on your customer demographics and purchase patterns. Test both options.

Examples:

• Instant $10 off vs $20 after friend’s purchase is verified
• Immediate 10% discount vs 20% store credit after 14 days
• Quick $5 reward vs $15 credit after order delivery

4. What rewards would your top customers find most valuable?

Analyze purchase history and customer feedback to determine preferences.

Examples:

• VIP customers prefer exclusive early access over small discounts
• High-volume buyers value free shipping more than percentage discounts
• Loyal customers appreciate double points/rewards over one-time discounts

5. Do different customer segments have different reward preferences?

Segment analysis reveals varying motivations and value perceptions.

Examples:

• New customers prefer immediate discounts
• Regular customers value loyalty points/credits
• Luxury segment prefers exclusive experiences over monetary rewards

Reward Type Analysis

1. Would a hybrid reward system drive better program adoption?

Mostly, direct discount for referee and loyalty points for referrer combination works well. Direct discounts appeal to first-time buyers while points encourage referrers to stay engaged.

Examples:

• Kleankanteen: $10 off for referee and $10 in loyalty points for referrer
• Blenders: $30 discount for referee and $30 in loyalty points for referrer
• Toad&co: $20 off for referee and $20 in loyalty points for referrer

2. Could exclusive products/early access be more valuable than discounts?

For certain customer segments, exclusivity and priority access drive higher engagement than monetary rewards.

Examples:

• Clothing store offering 24-hour early access to new collections
• Limited edition products available only to referrers
• VIP event invitations valued at $50+ instead of $25 cash reward

3. Would percentage-based discounts work better than fixed amounts?

This depends on your average order value (AOV) and price range variance.

Examples:

• 15% off works better for stores with wide price ranges ($20-$200)
• $25 fixed reward more effective for stores with consistent AOV around $100
• Hybrid model: 10% off + $10 fixed reward for orders over $150

4. Should VIP customers get premium rewards compared to regular customers?

Tiered rewards can motivate higher engagement and spending.

Examples:

• Regular: $20 reward, VIP: $40 reward + free shipping
• Standard: 10% off, Premium: 15% off + early access
• Basic: Store credit, Elite: Store credit + exclusive products

5. Would non-monetary rewards (like account upgrades) be valuable?

Some customers value status and privileges over direct monetary rewards.

Examples:

• Upgrade to premium membership status ($50 value)
• Free shipping for 3 months ($40 average value)
• Priority customer service access + dedicated support line

Competitive Analysis

1. What rewards do your direct competitors offer?

Research shows successful programs typically match or slightly exceed competitor offerings while maintaining profitability.

Examples:

• If competitors offer $10, consider $15 to stand out
• If industry standard is 10% off, offer 15% off
• If others give single-sided rewards, offer double-sided rewards

2. What’s the standard reward value in your industry?

Industry benchmarks help set competitive yet profitable reward values.

Examples:

• Fashion industry average: 15-20% of purchase value
• Beauty sector norm: $15-25 per successful referral
• Home goods standard: $30-50 off $200+ purchase

3. Are there unique rewards you could offer that competitors don’t?

Differentiation can make your program stand out and create talking points.

Examples:

• Bundle rewards with personal styling sessions
• Combine monetary rewards with sustainability initiatives (plant a tree + $20 credit)
• Offer choice of rewards (cash back, store credit, or charity donation)

4. What reward structures are working well in similar industries?

Cross-industry analysis reveals successful patterns and innovations.

Examples:

• Subscription boxes using “Give $30, Get $30” model
• DTC brands offering cumulative rewards for multiple referrals
• Marketplaces using dual-sided rewards with seller benefits

5. How can your rewards stand out while remaining profitable?

Focus on unique value propositions within sustainable margins.

Examples:

• Partner with complementary brands for expanded reward options
• Create time-limited bonus rewards during peak seasons
• Develop exclusive referral-only products or collections

Also read: Get inspiration from other ecommerce brands excelling in their referral programs in our 50 best referral program examples blog

5 Easy Steps to Choose the Best Referral Rewards

To choose the best referral rewards for your referral program:

Step 1: Analyze your current business numbers

The foundation of choosing the perfect referral reward starts with understanding your business metrics. By analyzing key financial metrics, you’ll establish clear boundaries for your reward values.

How to do it:

• Begin by calculating your current customer acquisition cost (CAC) across all marketing channels. Your referral reward should cost less than your CAC to make the program profitable.
• Next, examine your average order value (AOV) and profit margins carefully. A good rule of thumb is that your reward shouldn’t exceed 20-30% of your AOV.
• If your AOV is $75 with a 30% margin ($22.50 profit), you might set a minimum purchase of $50 for referral rewards.
• Also analyze your customer lifetime value (CLV) as this can justify higher initial reward values. If data shows that referred customers have a 20% higher CLV than customers acquired through other channels, you can afford to offer more generous rewards.

Step 2: Study Customer behaviour

Customer behavior analysis forms the backbone of effective reward selection. This step involves your customers’ pain points, preferences, motivations, and past responses to different incentives.

How to do it:

• Look at your top customers’ purchasing patterns over the past year. It includes frequency of purchases, average basket size, and most popular products.
• Pay attention to seasonal patterns too – do customers prefer different types of rewards during different times of the year?
• Look for patterns in different customer segments like new vs returning customer preferences, high-value customer behaviors, segment-specific motivation factors.
• Conduct customer surveys or interviews, social media comments, review patterns.

Step 3: Compare reward types against business goals

Comparing different reward types against your specific business goals is crucial for selecting the most effective referral reward. Each reward type has unique advantages and impacts on customer behavior, business operations, and long-term growth.

How to do it:

• Start by comparing direct discounts. It offers immediate gratification and is easily understood by customers. Also, they result in faster conversion rates and attract price-sensitive customers.
• Next, comes the store credits. It ensures future purchases and often leads to larger cart values – data shows customers typically spend 25-40% more than the credit value.
• Reward points systems are equally effective because they create a “special currency” specific to your brand.
• Also, try the hybrid model by combining different referral rewards for referrer and referee.

Step 4: Test Different reward values

Testing different reward values is a critical step that many businesses skip. This phase involves systematically trying different reward amounts and structures to find what resonates best with your audience.

How to do it

• Create a structured testing plan that examines both monetary values and reward types.
• For example, test $10 vs. $15 rewards, or compare a flat dollar amount against a percentage discount. Each test should run for enough time to gather significant data, typically 2-4 weeks per variation.
• Look at metrics like customer retention rates, repeat purchase behavior, and overall program ROI.
• Analyze both immediate impact and the long-term effects of different reward values.

Step 5: Make Final Selection Based on Data

The culmination of your research and testing should lead to a final reward selection. This decision should be based on comprehensive data analysis and practical considerations.

How to do it:

• From your testing phase take clear patterns of conversion rates comparison, customer lifetime value impact, program participation levels, cost per acquisition.
• For example, if your testing shows that a $20 store credit generates 30% more referrals than a $15 immediate discount, but also results in 40% higher customer retention rates, the store credit might be the better choice despite its higher initial cost.
• Remember to factor in operational considerations alongside performance metrics. A reward type might show excellent results but could be too complex to manage efficiently.
• The final selection should balance optimal performance with practical feasibility.

By following these steps you will be able to choose your referral rewards is a more prominent way.

Common Pitfalls to Avoid When Choosing Referral Rewards

When selecting referral rewards, many e-commerce businesses fall into these common traps.
Let’s explore what they are and how to avoid them:

1. Copying Competitor Rewards Blindly
   • Problem: Assuming what works for competitors will work for you
   • Impact: Misaligned rewards that don’t match your customer base
   • Solution: Use competitor research as a benchmark, not a blueprint
2. Setting Rewards Too High Initially
   • Problem: Starting with large rewards to make a big splash
   • Impact: Unsustainable program costs and reduced margins
   • Solution: Start conservative, test, and gradually increase if needed
3. Making Rewards Too Complicated
   • Problem: Creating complex multi-tier or conditional rewards
   • Impact: Customer confusion, abandon carts and low program participation
   • Solution: Keep reward structure simple and easy to understand
4. Ignoring Customer Preferences
   • Problem: Choosing rewards based on business convenience
   • Impact: Low engagement and poor conversion rates
   • Solution: Base rewards on customer research and feedback
5. Insufficient Testing Before Full Launch
   • Problem: Rolling out rewards without proper validation
   • Impact: Poor program performance and wasted resources
   • Solution: Run small-scale tests before full implementation
6. Overlooking Operational Impact
   • Problem: Not considering fulfillment and support requirements
   • Impact: Delayed reward delivery and customer frustration
   • Solution: Ensure loyalty systems can handle reward distribution efficiently
7. Focusing Only on Short-term Metrics
   • Problem: Making decisions based solely on immediate results
   • Impact: Missing long-term customer value opportunities
   • Solution: Balance short-term gains with long-term sustainability
8. Not Having Clear Terms and Conditions
   • Problem: Vague or missing program rules
   • Impact: Reward abuse and customer disputes
   • Solution: Establish clear, fair, and transparent guidelines

By avoiding these pitfalls, you’ll be better positioned to select rewards that work for both your customers and your business.

Final Words

The best referral reward isn’t always the biggest or most creative – it’s the one that balances customer appeal with business sustainability while remaining simple to understand and execute.

Quick Action Steps:

1. Start by analyzing your numbers TODAY
   • Pull last 3 months of sales data
   • Calculate exact margins and CAC
   • Determine your maximum reward budget
2. Begin customer research THIS WEEK
   • Survey top 20% of customers
   • Review past promotion performance
   • Analyze purchase patterns
3. Launch small tests NEXT WEEK
   • Start with 2-3 reward variations
   • Set clear tracking metrics
   • Run each test for at least 14 days

Need help getting started? Begin with Step 1 today by pulling your basic business metrics, and you’ll be well on your way to choosing the perfect referral reward for your business.

Other helpful resources:

• How to Set Up a WooCommerce Referral Program?
• 5 Best WordPress Referral Plugins
• How To Create A WordPress Referral Program?
• How to Reward Loyal Customers: 10 Best Ways
• Loyalty Program Management: 10 Best Practices + Software
• B2B Loyalty Programs: Complete Guide With Types, Examples & How-Tos
• 6 Types Of Loyalty Programs: Find The Perfect Fit For Your Brand