Word-of-Mouth and Referral Marketing Blog

5 Reasons Every SaaS Business Needs a Referral Program

Are you struggling to acquire leads and customers for your SaaS business?

Is your cost per acquisition getting too high?

Finding a sustainable and efficient customer acquisition channel can be hard these days, with the increasing costs of most online channels.

However, not everything is lost. Chances are you already have a pool of customers that use your tool often and are passionate about it.

That’s where a referral marketing program comes into play.

In this post, I’ll show you why you should have a referral program in place for your SaaS business so you can stop worrying so much about your customer acquisition and you can start focusing on delivering value.

Reason #1: Increase the Lead Quality and Quantity

Leads are the backbone of any SaaS business. Just think about it: no CMO will wake up one day and magically sign up for your tool. You need a lead generation funnel that:

  1. Brings qualified people to your site;
  2. Makes them realize they need your tool; and
  3. Makes them want to subscribe for a free trial.

But if you know anything about marketing, you probably know it takes a lot of time to acquire a big amount of high-quality leads. In a recent study by IDG, 61% of marketers reported that generating high-quality leads was problematic for their organization, the most common challenge of the survey.

In order to acquire a lot of high-quality leads, you need to create an efficient and cost-effective lead generation funnel. Not only that, but you also need to promote it, optimize it, and a whole lot more that would take another article to explain.

Referral marketing changes everything.

channel-effectiveness-quadrant
Referral marketing: Less costly, and high quality + quantity of leads

According to a study made by Software Advice, 78% of B2B marketers say referral marketing generates leads of good or excellent quality, while 60% say it generates a high volume of leads. Referral marketing also helps you have a more effective lead generation channel, given 91% of B2B buyers are influenced by word-of-mouth when making their buying decision.

Despite its effectiveness, most companies don’t use referral marketing as a lead generation channel, given it’s not mentioned in recent surveys.

Reason #2: Lower the Acquisition Costs

Any business, whether it’s SaaS or not, needs to acquire customers to survive. That’s business common sense.

There are literally dozens of ways to acquire leads and customers to your business: SEO, PPC, social media, you name it.

However, the key of the matter isn’t how to acquire customers, but how much will it cost you to do so.
If it was just a tactical thing, then any marketer would be able to create million dollar companies out of thin air. But doing so in a cost-efficient way, that’s where real marketers stand out from the rest.
Acquisition costs are so commonly overlooked that David Skok, a General Partner at Matrix Partners, says that they are the “startup killers“.

Business model viability, in the majority of startups, will come down to balancing two variables:

  1. Cost to Acquire Customers (CAC)
  2. The ability to monetize those customers, or LTV (which stands for Lifetime Value of a Customer)

A well balanced business model requires that CAC is significantly less than LTV.

David Skok – Startup Killer: the Cost of Customer Acquisition

This is where referral marketing comes to the rescue. Since referral marketing is powered by word-of-mouth, you can expect your acquisition costs to be lowered dramatically. The only cost of such a program would be the software that powers it. Fortunately for you, ReferralCandy specializes in helping SaaS companies to easily create referral programs for as low as $25 per month.

Besides making acquisition costs lower, referral marketing is more effective than almost any other marketing channel. For instance, word-of-mouth has been shown to improve marketing effectiveness by up to 54% while driving at least 5x more sales per impression. At the same time, a Nielsen report found that people are 4 times more likely to buy when referred by a friend.

This means that for every person that gets into your marketing funnel, you can expect them to be way more willing to buy from you, giving you a bigger bang for your buck.

Reason #3: Increase Your Conversion Rate

You can acquire lots of high-quality leads at a low price, but if they don’t convert into customers, you will be spending money without getting a high enough ROI. That’s why you need to have a good conversion rate that helps you take your leads from cold prospects to customers.

There’s a whole field of expertise inside the online marketing world that focuses on improving conversion rates. Not surprisingly, it’s called “Conversion Rate Optimization” (or CRO for short).

There are many tactics you can implement to increase your conversion rate: from using psychology persuasion principles to testing different layouts, there are countless different things you can do.

A tactic usually ignored is, you guessed it, referral marketing. According to a study carried out by Extole, referral marketing generates 3-5x higher conversion rates compared to any other channel. That’s a huge increase in conversion rates that most CRO experts wouldn’t shrug off.

So if your free trial conversion rate is 25% (a pretty low rate according to Lincoln Murphy), you can might witness it to grow up to 75%. Obviously, the study previously mentioned focused mostly on B2C and consumer-focused recommendations, so this may be a bit of an exaggeration.

But still, if you can take your free trial conversion rate up to 50% thanks to referral marketing (something totally doable according to Lincoln Murphy), you will have doubled your business over night. All thanks to referral marketing.

Reason #4: Lower the Churn Rate

Unless you are new to the SaaS world, you know what churn rate, and how important it is.

Churn rate is the annual percentage rate at which customers stop subscribing to a service. In other words, churn rate shows how many people unsubscribe per year from your business.

For this reason, churn rate is the boogyman of the SaaS world. A high churn rate means you are in trouble, whereas a low one means your business is safe and sound.

To illustrate what makes churn rate so important, let’s use an example. Imagine you have a business with a 50% annual churn rate (which is high). If in a year you don’t acquire any new customers nor increase your average revenue per user (ARPA for short), next year 50% of your customers and revenue will be gone.

That’s why SaaS founders and marketers obsess about churn rate and how to lower it. It can make or break a SaaS business.

The only way to lower the churn rate is by focusing on a retention strategy. The goal for each customer attained is to retain him or her for as long as possible.

Referral marketing can help increase the customer retention: according to Deloitte, customers referred by other customers have a 37% higher retention rate.

Obviously, this means you need to acquire users from referrals to see the results. However, if you use referral marketing to get more leads at a low price, you can expect them to stay longer with you.

Reason #5: Increase Your Customer Lifetime Value

A few paragraphs before I explained to you how a SaaS business viability can be defined by two factors: low customer acquisition cost and high lifetime value (LTV for short).

The lower the acquisition costs and the higher the lifetime value, the more profitable and sustainable your business becomes.

Before explaining how referral marketing can help you increase your lifetime value, we need to define what it is in the first place.

The simplest definition of lifetime value says it’s a prediction of the net profit attributed to the entire future relationship with a customer. In other words, the lifetime value shows how much money your business is expected to make on average from each customer during the time they are a customer of yours.

The mathematical calculation for LTV can be a bit harder, but in its simplest form it goes like this:

Customer lifetime value = ARPA / churn rate (where ARPA stands for “average revenue per account”)

For more mathematical definitions and calculations you can refer to this comprehensive article on SaaS metrics written by David Skok.

According to a study made by the Wharton School of Business, referral marketing can help you increase your lifetime value because each referral customer’s lifetime value is 16% higher than an average non-referred customer. Not only that, referred customers bring 25% higher profit margins.
As you can see, referral marketing can help you increase the time they keep as customers, while helping you make more money at the same time, killing two birds with one stone.

Conclusion

In order to have a successful SaaS business, you need to acquire leads at a low cost, convert them into customers as effectively as possible, and keep them happy for a long time.

Referral marketing can help you achieve all these things thanks to the power of word-of-mouth and the trust that it comes with it.

The numbers I showed you speak for themselves. That’s why you need to get started as soon as possible with your referral marketing program.

Your customers (and their friends) will thank you for it.

Have you ever thought of starting a referral marketing program for your business? If not, what is stopping from doing so? Please share your thoughts in the comments below!

Ivan Kreimer

Ivan is a writer and a content marketing consultant that specializes in working with SaaS businesses.

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