How do you decide whether or not you should run a referral program?
The same way you decide how to do anything else – you have to weigh the pros and cons.
You want to be clear that you’re going to get out more than you put in. This means quickly coming up with some rough projects for the sort of referral sales you expect to get.
By now, you should be clear that referral programs can have some of the highest ROI of all marketing channels: but if you’re not, here are some examples to help persuade you:
Referral programs have some of the highest return on investment (ROI) of all marketing channels.
- Dropbox’s referral program (above) helped them grow from 100,000 to 4,000,000 users in 15 months. That’s roughly 30% growth month on month!
- PayPal achieved 7-10% daily growth in the early 2000s with their referral program, even without social media. They had 100,000 users in the first month, for $40 per new user.
- Airbnb’s referral program brought it millions of dollars of revenue, and even had a single user refer thousands of users and hundreds of signups in a single month.
Many studies prove this, too – referral marketing yields high quality leads.
- A Software Advice survey (above) found that 78% of B2B marketers find that referral marketing produces ‘good’ or ‘excellent’ leads.
- A Wharton study found that referred customers generate 16% more in profit and 18% more likely to build relationships with the retailer.
We’ve seen this with our own retailers’ referral programs as well:
- Brooklyn-based sneaker moguls GREATS (above) saw over 20x ROI on their referral program.
- Innovative mattress company Leesa saw 33% of all new sales coming in through referrals.
So, how do you calculate the ROI of a referral program?
There are many different ways you can look at this, depending on your business needs.
At the most basic level, you should think in terms of cost vs revenue.
How much are you spending on your referral program (cost of incentives + cost of running the program), and how much revenue are you getting in sales?
If your referral revenue exceeds your customer acquisition cost, then you’re definitely getting a positive ROI on your referral program. This should be the rule-of-thumb heuristic to use to decide whether to keep running your referral program or not.
Consider the following example:
- Tesla Motors was giving away $1,000 as a referral reward.
- The most successful advocate, wei70644, made 188 referrals, costing Tesla $376,000 in referral rewards
- Tesla made $15,980,000 in revenue from the referred sales.
That’s a 40x return on investment!
Let’s dig into the details of the cost-benefit analysis.
1. Time cost of setup.
We’ve seen people setup in a record time of about 45 minutes. But realistically we recommend setting aside a couple of 2-3 hour sessions over two days. This is the time that you’ll spend setting up your incentives, coupon codes, writing the copy for your referral emails, running tests, setting up your basic referral program promotion and so on. (Check out the Referral Marketing Checklist for more about this.)
2. Cost of service provider (or cost of setting up your own referral program).
Setting up your own referral program can be daunting – Airbnb needed a 5 person team (with lots of borrowed help!) to devote 3 full months and 30,000 lines of code to do Airbnb’s Referrals 2.0 system. You’re almost definitely better off using a service provider like ReferralCandy, which charges a commission on referral sales that the app brings in.
3. Cost of incentives.
The great thing about referral programs is that the incentives are pay-as-you-go. Unlike advertising, where you may end up paying money on an ad that doesn’t convert, you only have to pay incentives to people who actually make referred purchases. So you can actually safely not worry about this bit.
1. Volume of referred sales.
This, of course, is the #1 thing that every retailer wants to get out of their referral program: more sales.
2. Marketing reach through your advocates.
A referral program can be great for your marketing efforts even if nobody actually buys anything through it. Why? Because it’s a way for people to find out about your brand through their friends.
3. Advocate information.
It’s good to know who your advocates are, and referral programs help you find that out. You can then use this information in remarketing efforts – if you’re small, you definitely want to reach out to these folks personally and encourage them for being ‘super-fans’ of your business.
You might even discover unexpected influencers in your midst – you’d definitely want to build relationships with them!
4. LTV of referred customers.
Even if your referral revenue barely scrapes past the cost, Customer Lifetime Value means that it’s possible for you to have a positive ROI on your referral program. Once you have a new referred customer, you have a budding relationship that you can invest in.
You can market to them via email, get more future sales, more word-of-mouth, more referrals. And, as several studies have noted, referred customers stick around longer and spend more – they’ve been “selected” for.
So – if there are so many ways of evaluating the ROI of a referral program…
… how do you decide whether you should run one or not?
It’s simple, actually – you just need to watch out for the red flags.
Red flags: You shouldn’t run a referral program if…
1. Your Net Promoter Score (NPS) score is low.
A good way to tell if you should be running a referral program is to literally ask your customers.
Good signs include:
- You’re already getting organic referrals on social media
- Your customers are telling you that they were referred by friends
- Your customers are asking if you have a referral program
If not, you’re better off focusing on getting your NPS score up first.
2. Your transaction volumes are low. (Less than 200/month)
Referral marketing is partially a numbers game, and you’ll have to take that into account when you’re thinking about setting up a referral program. While over 80% of satisfied customers say they’re willing to make referrals, only about 20% actually do so.
So if you want to see a return on your referral program, you’ll first need a significant raw number of customers who can participate in your referral program.
3. Your marketing channels are not yet mature
Referral marketing is something that works great as a sweetener on top of your existing marketing channels. You’ll want to…
- Lean on your social channels like Facebook and Instagram to reach out to customers
- Have a good volume of traffic on your primary site, where you should put calls-to-action for your referral program
- Reach out to your existing mailing list of customers and fans with information about your referral program
- Post about your referral program on your blog as part of your content strategy
If you don’t already have your basic marketing channels set, you’ll want to get those running up to speed first before you setup a referral program.
Once you’ve set it up, how do you improve the ROI of your referral program?
You want to be systematic about it.
The way to do that is to evaluate separate parts of your referral marketing funnel, and act to improve your conversion rate each step of the way.
Here are the most effective tactics we’ve seen:
1. Get your referral program in front of as many people as possible.
1a. Display your referral program prominently on your main site:
1b. Send as many referral emails as possible:
One of the best ways to do this is to send out an email blast to your past customers.
This front-loads your referral funnel with lots of potential advocates, which means a lot more potential referrals.
2. Use post-purchase popups and reminder emails
One of the best times to ask for a referral is right after a customer has made a purchase: they’re happy, you have their attention, and they’re likelier to be willing to give a shoutout to friends who might also be interested in the same product as them.
Once your customers have signed up for your referral program, it’s worth reminding them periodically about the rewards they can earn for making a referral:
3. Optimize your referral emails to maximize conversions.
4. Improve your open rates on social media by using Twitter Cards.
5. Make sure your copy converts well.
Referral programs aren’t always just about getting a cash reward or a discount. If your customers have other intrinsic motivations to buy your product, you’ll want to tap into that.
Conclusion: Referral programs can be incredibly high ROI, but you need to have the right conditions and put in the work
Tools like ReferralCandy have made it easier than ever to run an automated, customized customer referral program for your ecommerce business.
But referral programs aren’t magic – they still need preparation in order to do well. You need to get your fundamentals right first – make sure you have a good NPS score, be getting organic word-of-mouth, and have your basic marketing channels set up and running.
Learn more about referral marketing:
- Why Referral Marketing Is Awesome
- An Epic List of Referral Program Examples
- How To Setup Your Referral Program
- How To Promote Your Referral Program
- How To Measure and Improve The ROI On Your Referral Program [You are here!]
Other ROI-related questions we’re planning to answer next:
- What’s the most cost-effective form of ecommerce marketing?
- How does referral marketing make money?
- How do you get more referral revenue?
- How does referral marketing fit within your ecommerce marketing framework?
- What referral messaging converts best?
- How does referral marketing perform compared to social media, ads and influencers?
- How do you get as many referral link shares as possible?