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Comparing Referral Marketing VS Paid Social ROI for eCommerce: Which should you use?

Which channel to prioritise? Every marketing team faces the same problem of resource competition. In this article from ecommtips, we evaluate how to assess referral marketing vs paid social based on ROI, and the surprising conclusion.

Every eCommerce brand has a referral program in place. It drives sales, boosts brand awareness, and grows your subscriber lists — what’s not to love?

Alongside this, every online business worth its salt also has a social strategy. Offering huge reach and a wealth of tools and data to connect with customers, it’s all but mandatory for ecommerce businesses in 2019.

But for real growth, you need to look at your ROI. How do we calculate the ROI of referral marketing and paid social ads? And with two such disparate marketing strategies, is it possible to compare their ROI? Read on to find out.

Recommended reading: Referral Program Metrics and Benchmarks: What Is A Good Referral Rate?

Which is better for ROI, referral marketing or paid social?

Let’s look at the current state of ROI for referral and paid social.

How to calculate Referral Marketing ROI

Referral marketing has one of the highest ROIs out of all channels. It’s fairly easy to calculate in its most basic form. The main costs of referral marketing are:

  • Incentives: the rewards or discounts that incentivize your referrals.
  • Referral program: the regular cost of your referral service provider or app, or a one-off cost of setting it up yourself.
  • Time: the staff hours it took to set up your program.

But the benefits of a referral program are more numerous, such as:

  • Referee reach: when referees recommend your brand to others, it exposes you to a wider audience (even if they don’t buy anything).
  • Volume of referred sales: the crux of referral marketing. More referrals (hopefully!) mean more sales.
  • Customer data: when people sign up, you get their personal information which can help you with targeting and segmentation.
  • Lifetime value of new referrals: once a new referral is in your system, they’re in your marketing ecosystem and you can market to them time and again.

Weighed up against the benefits, referral marketing is highly profitable.

How to calculate Paid Social ROI?

It’s traditionally been difficult to calculate the ROI of social media in general. But while it’s hard, it’s not impossible, and paid social ads are easier to track conversions through.

The costs are fairly straightforward: The main costs of paid social ads are:

  • Time: the staff hours required to create your paid social ad strategy.
  • Cost-per-click: this varies from platform to platform, and is further complicated by other variables such as target audience size, time of day, and so on.

But it is the outcomes that are harder to track. Analytics vary from platform to platform, and we are often presented with less tangible results such as likes, shares, and comments, rather than hard sales.

As a rule of thumb, using SMART goals to track your social ROI will stand you in good stead. SMART goals are as follows:

  • Specific: be specific about what goal you want to accomplish. Your followers, mentions, click-throughs, and so on are what matter.
  • Measurable: what metrics will you use to identify when you reach your goal?
  • Achievable: how will you achieve it? What team members, skills, and tools are needed to do so?
  • Relevant: your goal should align with your overall business goals.
  • Time: set a deadline for when your campaign is finished and you should start measuring results.

Setting SMART objectives help you measure the overall success of a paid social campaign,

I’m going to throw you a curveball here: referral marketing and paid social aren’t mutually exclusive. In fact,

To get the best ROI for eCommerce, you should combine paid social with your referral marketing

Your referral marketing budget and your paid social budget aren’t exclusive — they should be one and the same. Cross-pollinate your budgets to maximize your ROI.

Both paid social ads and referral marketing are part of the customer journey. They both offer good ROI, albeit in different ways. Combining the two creates a powerful blend that fills the gaps that the other strategy lacks.

1. Find your new audience with paid social

The first stage you should focus on is finding a new audience. Yes, referral marketing gets you new customers, but only off the back of existing customers. Paid social ads net you a wider customer base altogether. They can be targeted to specific consumer demographics outside of your usual reach, and your initial investment opens up new communities to your referral program.

Communities are powerful ways to drive referral success and sales. Mums helped drive Riff Raff & Co sleep toys to a million dollar business, and Tesla lovers helped Tesla outsell Mercedes in America.

Paid social ads spark the awareness stage of your new customer’s journey, creating the foundation for your referral program.

And these new customers? They become your new referrers.

The key here is to needle those qualities that drive conversions. Well-targeted social ads already go for individuals who are likely to convert, so your ads should capitalize on that. Highlight your brand’s USP and create trust.

The benefits of paid social ads are:

  • They can be targeted: using existing consumer data, you can market your ads to customers most likely to engage and convert.
  • They take advantage of populous platforms: virtually everyone has at least one social media profile, if not more. Your customers are on social — fact.
  • They offer plenty of creative variety: canvas ads, videos, sponsored tweets, dynamic ads, and so on.

When paid social ads offer so much creative scope, it makes sense to combine them with your referral marketing strategy.

2. Engage your new audience with referral marketing

Once you’ve reached your new audience, it’s time to engage them with a slick referral program.

A rewarding referral program is enough to convince dithering customers to spend money with you, especially if the rewards go both ways. If the referee [Ed: the referred new customer] gets 20% off, so should your referrer.

Create a series of storytelling sequential ads that build on your new customers’ awareness of your brand. There’s a lot of creative scope here, but try offering different rewards for each ad. Some customers might not be swayed by a percentage discount, but will jump at the chance to bag a freebie.

These sequential ads need to create a positive perception of your brand — it is this positive brand story, parallel to your incentives, that drive a successful referral program.

Social media is the perfect channel to launch and promote your referral program. Don’t just go for the hard sell though: it takes time to build up trust.

Simply offering a great incentive isn’t enough to generate referrals. You need to woo your audience, creating authentic ads that promise to reward the customer rather than simply selling to them.

Segment your ecommerce customers for effective targeting. Take advantage of the wealth of consumer data social media has to offer to go for those individuals who are most likely to convert. For example, if you have a new festive cookie cutter dropping, go for those shoppers with an interest in baking.

And you don’t just need to chase new customers. Take this further by targeting your best referrers with a tiered reward program, offering them greater incentives for every new person they refer.

Create a dedicated referral loyalty program that rewards repeat referees with better incentives and promote it to your best referees on social — your existing customers are just as important as your new ones, and this will drive up referrals considerably.

3. The real metric you need to track is customer journey ROI

Ask any digital marketer which ROI metric you should track, and you won’t get the same answer twice.

But the real metric you need to track is your customer journey ROI. This the cumulative ROI of all the micro conversions your customer makes as they move through the funnel.

For example, let’s say 20 of your customers downloaded an ebook during the research stage. How many of them went onto to make a purchase, or sign-up to your email newsletter?

At this stage, you need to look back to your SMART objectives. What goals matter most to your brand? More sales? Higher follower counts? Increased brand awareness? Identify these goals and assign a value to them. This will go towards your overall customer journey ROI.

While calculable conversions such as sales are easy to assign a value, less tangible actions, such as email subscribers, are less so. The value you assign to them will vary depending on the relevancy of your SMART goals to your business — that’s down to you.

As with so many ROI comparison pieces, there is no right answer. Instead, focus on using both paid social and referral programs in tandem rather than as separate strategies. Follow the tips above and implement a creative marketing strategy with real ROI today.


Ecommerce Tips is an industry-leading ecommerce website that shares the latest insights from the sector: by entrepreneurs, for entrepreneurs. For everything from business growth hacks to product development, find the latest on Twitter @myecommercetips

Raúl Galera

Raúl Galera

Raúl is ReferralCandy's partner manager.