What are the Best-Practices for a Successful Referral Program?
Are you contemplating a customer referral program for your e-commerce site, but not sure if it will work for your business? There are tons of refer-a-friend programs out there, but will a program work for your customers, not to mention what kind of ROI can you expect? If the term “referral marketing” makes you think of yet another expensive marketing campaign, think again, referral marketing has the lowest cost per acquisition of all digital marketing strategies, and there are some best practices that can help you achieve your goals.
At Buyapowa, we are lucky that we get to do what we love, each and every day: help brands acquire new customers while keeping their current customers happy. We love our job and get giddy when people ask us for our advice on referral marketing, and lately, we have had a lot of questions around referral marketing for the e-commerce world. So we thought, why don’t we share our customer referral program best practices with you?
We are happy to present the first blog of our two-part blog series dedicated to customer referral programs for e-commerce sites; in this blog we will cover what referral marketing is, what a referral program looks like for an e-commerce business, the impact a program can have to a company’s bottom line and how you can identify ROI to determine if a customer referral program will work for your business.
So What is Referral Marketing Anyway?
To understand customer referral program best practices, it’s best to start with clarifying what referral marketing is. You may also hear it referred to as a customer referral program or a refer-a-friend program.
Referral marketing is a method of promoting products or services to new customers through referrals, usually word of mouth.
Essentially, you encourage people to share the word about your products with friends, family and social circles, helping you to acquire new customers with the help of existing customers. For instance, if you have an e-commerce site that specializes in vitamins and supplements, you may encourage your loyal customers to refer their friends to purchase from your site, and if they do, they will receive a 10% discount towards the purchase of product on your site and their friends may also receive 10% towards their first purchase. This is a win-win for both parties and also a benefit for your business because you have gained a new customer and have made an existing customer happy.
We built a customer referral program for Puritan’s Pride that rewards both the referee and referral with a 10% discount. The program makes it really easy for both the referee and referral – giving them the option of signing up with just an email address and password or with a Facebook account.
But Do Referral Programs Really Work?
According to a report by Nielsen, 92% of consumers around the world say they trust earned media, such as recommendations from friends and family, above all other forms of advertising, and people are four times more likely to buy when referred by a friend.
But How Does it Impact the Bottom Line?
You may be thinking, “I can adopt these customer referral program best practices, but how will it affect my business’s bottom line?” Well, we know that it is easier to sell products to existing customers (60-70%) then it is to sell to new customers (5-20%), but do you know what the is return on investment of a customer referral program? The ROI of referral marketing has several layers and costs that you have to consider, including:
- Cost of new customer
- Cost of lifetime value of the referee
- Cost of lifetime value of the referral
referred customer has a 16% higher life-time value.
Let’s say a new customer receives a $25 reward for being referred to and purchasing from your site. The customer receives the item and is impressed with the product and your impeccable customer service. This happy customer will be very likely to return to your site and purchase from you again. It’s the gift that just keeps giving!
A referred customer is 18% more loyal than a customer acquired through a different method and spends 13.2% more than a non-referred customer.
How Do We Calculate Your Referral Marketing ROI?
1. Calculate the Lifetime Value of a Customer
How much you will earn from an average customer over the lifetime of using your product? Your factors to calculate include:
- You sell electronics and your average customer spends, on average, $25 a month (factoring in that they will probably make one large purchase of $300 a year/12 months).
- The average customer lifetime is 24 months
- The average up-sell is $50
LTV = (Average customer lifetime * average monthly purchase) + Average up-sell = (24 * $25) + $50 = $650
2. Factor in the Referral Program
- Your reward is 20% off to both the referee and the referral for 12 months
- The referee user spends approximately $25/month
- And the referral user signs up and also spends $25/month
Reward = 12 * ((20% * $25) + (20% * $25)) = $120
3. Calculate the ROI
ROI = (LTV – Reward) / Reward = ($650 – $120)/($120) = 4.4
If your ROI is over 1, congratulations, your reward program should most likely be profitable. If you score under 1, you should tweak the reward in order to score over 1. Also remember that when you implement a customer referral program each customer becomes more valuable, because they will now help you find new customers.
Will it Work for My E-Commerce Business?
Before you invest in the resources to create your customer referral program, do your research. Determine if your customers are even ready for a referral program. Conducting a customer survey can gauge customer insight into whether or not something of this nature would fly with your customers. Call your most loyal fans and ask them how likely they will be to promote your products and or services to their friends and family. It can’t hurt to ask!
If you have a customer care team or sales team, get them involved. As they spend the majority of their day interacting with customers, it will be easy for them to engage in the dialogue. There are also software programs that you can use to conduct survey customers to gauge customer insight for a larger audience.
Identify Key Referrers – Start a Community
Now that you know that your customers will be interested in a referral program, it’s a good time to start an ambassador list aka start a community. Check out your loyal social media fans – find out who likes your posts and comments on your blogs. Compile a list of your already established brand ambassadors that you can leverage when you are ready to get your referral program off the ground. If you start to build your community early on in the process, it will help you later on.
To determine if a customer referral program will work for your e-commerce business, remember to check the following:
- Calculate your ROI – Does it make sense financially for you to launch a customer referral program?
- Contact brand ambassadors – Contact loyal customers and ask them if they will be willing to promote your products and services.
- Conduct a customer survey – Gauge customer interest and reach a larger audience with a customer survey.
- Involve customer care and sales teams – Ask teams who are constantly speaking with customers to talk to them about what will motivate them to refer!
- Identify key referrers – Start a community.
Stay Tuned for More Customer Referral Program Best Practices
Check here for part two of our two-part blog series dedicated to customer referral programs for e-commerce sites. As always, if you have any questions about customer referral program best practices and would like help determining if a customer referral program will work for your e-commerce business, contact Buyapowa and find out how we’ve helped other e-commerce sites acquire new customers, and increase loyalty with their existing customers.