Building the business case for referral marketing

Brands supercharged by referral marketing

What can referral marketing bring to your business?

Maybe you’re wondering what a well run and managed referral program could bring to your business? Perhaps you’ve seen some breathtaking headlines in the press and wonder how that can be true? Maybe you even tried and failed with referral marketing before and are a little sceptical about whether it can work for your business? Maybe you’re just a natural born sceptic, and that’s fine? A little bit of scepticism never does any harm. But whatever your case, we thought we’d document some of the case studies of referral marketing success and provide examples of what a well run and managed referral program can achieve.

Now you probably all that know that several iconic and unicorn businesses were built on referral marketing, for example:

Uber’s ex-CEO Travis Kalanick famously claimed that:

95% of all our riders have heard about Uber from other Uber riders” and reputedly for every 7 Uber rides, word-of-mouth generates a new user

Slack’s CEO and Co-Founder Stewart Butterfield stated in 2015 that:

97% percent of new customers…[are] referrals” and that people hear about how useful, and efficient Slack is from friends in the office, colleagues…

Tesla’s CEO and Founder, Elon Musk, claimed a 42X ROI on each dollar spent on referral marketing and that a quarter of sales in 2015 came referrals:

“Word of mouth has always been a major part of how Tesla sales have grown… When I meet Tesla owners, one of the first things they often tell me is how they have convinced many others to buy the car.”

Dropbox’s CEO and founder, Drew Houston claimed in 2017 that 35% of all daily signups came from its referral program and said:

“What ended up really working was we had this incentive referral program, so that if I invited you to Dropbox, you would get some free space, I would get some free space, so that two-sided incentive and kind of game-ifying ended up making something that was otherwise a pretty single-player utility into something that people used for sharing or that spread virally.”

Airbnb’s Head of Engineering Jason Bosinoff claimed in 2014:

“Referrals increased bookings by over 25% in some markets.”

But you might think that these examples are a little old, or that they were only relevant for fast growing businesses while they were ramping up, and that referral is not so relevant for established businesses. Well, in both cases you’d be wrong.

For a start, here are some contemporary examples:

  • Shortly before its successful IPO in December 2020, Airbnb announced that 91% of all traffic to its website came through direct or unpaid sources, including turning guests into brand advocates and acquiring hosts by referrals.
  • In 2021, UK recipe box provider Gousto announced that due to its investment in brand marketing, 82% of its sign ups come organically or via the referral program.
  • Nu Bank, a leading fintech in LATAM, announced in 2020 that it acquired 80% of all customers in Brazil via referral despite offering no referral rewards or incentives other than a non guaranteed better chance of getting a Nu card.
  • Polish mobile brand Mobile Vikings recently stated that it drives 70% of all new customer acquisition from its MGM program.
  • Kim Faura, the ex-Chief Consumer Officer at UK mobile network Giff Gaff, stated at the UX Telecoms Exchange event in 2017 that it got 50% of its growth from referrals.
  • A leading global meal-kit delivery service recently disclosed to us that it drives 40% of all customer acquisition from its referral program.
  • Two leading UK based pre-paid telecoms brands currently achieve between 25-35% of all new customer acquisition through their referral programs.

Hopefully these recent successes across a variety of different industries and geographies have convinced you that referral marketing remains very much a potent and relevant customer acquisition strategy today, and not just for new businesses, but also mature businesses seeking to launch new business lines or convince existing customers to take out new products with them, or even win back lost customers. And actually, as you can see from these examples: no brand is too big for referral.

So what’s a referred-in customer worth?

Research from Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte from Wharton University in 2013 compared some 10,000 accounts at a leading bank over a three year period and found that, after accounting for a referral reward of 25 euros, referred in customers:

  • were 25% more profitable;
  • churned at an 18% lower rate;
  • had a 16% higher LTCV over six years;
  • generated a higher CLV of 40 Euros and, before allowing for the fact that the customer acquisition cost was 20 Euros less, had a conservative 60% ROI over six years from referrals.

Indeed, our client survey in 2022 found that the referred-in customers typically spend 47% more than customers acquired by traditional channels.

What does a referred-in customer cost?

The elements to consider in determining the cost of a customer from a referral program include the costs of:

In the example of the leading global frozen meal delivery service mentioned above, we understand that the in-house team running referral comprises 40 people, and we also know of a leading European iconic travel business that has 30 staff dedicated to referrals. That’s before we factor in the costs of any agency support. In those cases, you can imagine that staff costs can be a high percentage of total costs. However, where a program performs well, the largest part of the total cost is typically the cost of the rewards and incentives paid out, and the software cost is a low overall percentage, being a fixed cost amortised across a large number of referrals.

A factor to consider is also whether the rewards and incentives have an actual or immediate cost to your brand. If you pay out cash rewards or third party vouchers then, to the extent that these are claimed by the referrer and referred-in friend, these have an immediate and real cost to your brand. However, if you pay out gift cards, loyalty points or offer discounts on future purchases, these may never be used and not have any cost to you, other than costs for issuance. If you offer a product or service, the apparent value to the referrer or referred-in friend may be much higher than the actual cost for you, for example in the case of Dropbox offering free storage, which has almost no marginal cost for the brand but has a cash value in the eyes of the customer.

Due to all the different variables at play, it’s difficult to give one figure as to the CPA from referrals. Instead it’s easier to compare the cost of a referred-in customer with the acquisition cost from other channels in percentage terms. Here our client survey in 2022 found that the CPA for customers acquired from referrals was typically 53% less than that from other channels.

In Summary

Hopefully we’ve convinced you that referral marketing can drive a very significant proportion of total customer acquisition, and bring better customers at a lower CPA. If you’d like to know more about how this could work for your industry, contact us and we’d be happy to help you model a business case for referral.

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