How Uber’s Referral Program Drives Radical Growth

What you can learn from Uber about the power of referrals

When Uber was born, the newest wave of transport innovation took to the streets. Since then, Uber Technologies has been on quite the ride as the world was introduced to a revolutionary service that brought the sharing economy to the transportation industry – without owning any vehicles of its own.  These innovative twists on the traditional taxi business model are characteristic of Uber’s rise to prominence and the company shows no signs of hitting the brakes.

Uber Homepage

A number of factors have fueled the rideshare company’s rapid growth. Features like the quality of their service and viral promotions have helped propel Uber to its current heights, but nothing has had as direct of an impact as their referral program. Uber has used referrals consistently since the very beginning and has reaped the benefits of referrals done right. While it may seem like a simple system, Uber’s referral program is one of the most powerful engines that continues to drive growth for the company year after year.

So what makes Uber’s referrals so strong? Buckle up because we’re about to take a look under the hood of the program to see how it works and how Uber has leveraged referrals to grow their brand.

 

Uber’s Referral Program is a Passenger’s Ticket to Ride

While both riders and drivers are essential to Uber, the brand’s revenue stream is largely based on its riders. These are the individuals who actually pay to use the company’s services and who ultimately provide Uber with its financial stability. Wooing these riders is easier said than done, as there are a wealth of competitors vying for their limited attention. Taxis, public transportation, carpooling and even walking are all viable substitutes – and Uber knows it.

Uber operates in a competitive market so they need a strong referral program

With such fierce competition it’s no surprise Uber offers a free ride (around $20 depending on the city) to both a referrer and a new rider upon a successful referral. This program gives frequent riders all the incentive they need to convert their friends and family into Uber customers while giving new customers the perfect introduction to the service.

Uber's referral program helps riders experience the brand

A free ride is valuable to customers who use the service often as they know they’ll actually be able to put that reward to use. Frequent users are also the most qualified to explain the value of Uber as they have the most experience with it. Providing these users with a valuable referral reward is the definition of a win-win.

Doubt and uncertainty create friction in the adoption of new products

Giving a free ride to the new user makes sense because customers frequently have many doubts and uncertainties that stop them from trying a new experience. The free ride tears down any objections a new user may have because the referral bonus allows them to try Uber risk free. A new rider taking part in Uber’s referral program gets to experience the benefit of Uber without having to shoulder any costs until they are sure the service works for them.

This strategy may seem like it costs Uber more than it is worth but the opposite is actually true. When attracting customers, a brand has to balance two competing factors: customer acquisition cost (the cost a business bears to gain a new customer) and customer lifetime value (the money a customer will return to the business over the total time they remain a customer).

Uber-Referrals-CAC-CLV

It’s easy to see that if a business’s customer acquisition cost is larger than their customer lifetime value they will run themselves into the ground. Each customer costs more to acquire than they will ever pay back to the business. When this is reversed, however, a business is in good shape.

A frequent uber customer spends $95 a month on uber

With a $40 customer acquisition cost ($20 to the existing customer and $20 to the new rider) Uber this is where we find Uber. A frequent Uber customer will spend an average of $95 a month on the service and 25% of that fee is Uber’s to keep. This means that in less that 2 months the initial acquisition cost has been paid off and Uber can benefit from an entire lifetime of customer purchases created by their initial one-time referral investment.

 

Getting in the Driver’s Seat With Uber’s Referrals

Uber’s service relies on a two sided network effect; the more passengers there are seeking rides through Uber, the more appealing it is to be an Uber driver. Conversely the more drivers there are on the road, the better the service is for riders. Businesses that involve a two sided network effect must effectively manage the growth of their partners because if this demographic slips the end consumers are sure to follow suit. In other words, Uber must ensure that their drivers grow proportionally to their riders or both segments (and the brand) will eventually suffer.

A two side network effect happens when two different customer groups provide value to each other through a service.

Uber’s driver referral program shows a keen understanding of the important role drivers play in the Uber network. It is designed to reward existing drivers substantially for the act of bringing a new driver onto the platform.

If you thought the rider referral was powerful, you haven’t seen anything yet. Uber pays out somewhere in the neighborhood of $200 for a driver referral depending on the city (paid to both the referrer and the referee)! I can’t think of a better example of a brand putting their money where their mouth is. Uber could tell new drivers how lucrative it is to drive for them or they could just show them with a signing bonus that lives up to the brand promise.

It is more valuable to show a user your value than to tell them about it

The financial compensation isn’t the only strength of Uber’s driver referrals. The program is structured so that the bonus doesn’t get paid out unless the new driver completes more than 25 trips in their first 30 days.

This mandatory minimum strengthens the referral program because by getting the new driver to complete 25 trips, Uber begins recouping their investment in that driver immediately. This ensures  that by the time Uber actually pays out the bonus, the driver has already made a non-trivial contribution back to the company’s bottom line.

Uber's Drivers

Additionally, requiring 25 trips in 30 days exposes the new driver to the value of driving for Uber by forcing them to give the service a genuine chance. A driver who completes an average of almost a trip a day for a month is going to have a much more accurate impression of what it is like to drive for Uber long term. This realistic job preview leads to less churn from unsatisfied drivers who never gave the service a fair shake.

 

Personalized Referral Codes Give Customers A Voice

A critical mechanic in Uber’s referral program is the fact that drivers and riders alike are able to create their own custom codes when they refer an individual to the service. Instead of generating a random string of letters, numbers and special characters that would have as much personality as a piece of gum, Uber referrers are encouraged to personalize the code that they share with friends and family as they recruit future Uber users.

Uber allows drivers and riders to personalize their codes

While this may seem like a trivial detail I can assure you it isn’t. A personalized referral code puts the “word” back in word of mouth marketing by allowing riders and drivers to communicate the brand in a way that is natural to them.

The benefit of this organic communication is twofold. First, because the referral code is something they have created themself, the referrer is more comfortable sharing this code in both public and private spaces. The simple act of personalization makes the referral an extension of their personal brand which is easier to share in one to one conversations as well as on public forums like social media.

Customized codes allow customers to view the referral as an extension of themselves.

Secondly, a personalized code is more approachable for the new user. When you see a referral code that has been personalized to your friend or family member you are more likely to associate it with the person (who you are familiar with) than the brand (which you are a stranger to). This association effect removes resistance from the registration process by borrowing familiarity from the person and using it to combat the discomfort that usually accompanies trying new things. Mechanically it is also much easier to correctly type in a conversational code like “RideWithMike” over a generic scramble like “S9e@4rR45”.

 

Uber’s Referral Program is a Roadmap for Growth

Uber’s referral program is a great example of how to use referrals to drive growth in a hyper-competitive market. Creating a value proposition that is appealing to riders and compelling for drivers has allowed Uber to beat out taxis and other traditional competitors as well as newer rivals like Lyft. Allowing these users to personalize their referral codes has helped to fuel the viral growth that has made Uber the billion dollar venture it is today. So whether you’re driving across town or driving growth for your business, you might have a lesson to learn from Uber.

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About the author: Demi Oba is Loyalty Analyst and Retention Specialist at Sweet Tooth. He is fascinated by consumer behaviour, the ecommerce industry and all things superhero.


Follow him on Twitter@demioba