Referral program ROI is an all-important metric for understanding the profitability of trusted recommendations. It describes how much money a company generates through referrals, less the operating costs.
Return on investment empowers businesses to evaluate referral programs. It allows them to assess the impact of referral-centered investments on generating revenues. Moreover, ROI data enables business owners to create more effective strategies and tactics to increase revenue and limit referral program costs.
So, how do you calculate the ROI of a referral marketing program? What factors and strategies should you consider to boost the program’s profitability? Let’s find out.
What is a Referral Program ROI?
Businesses exist to make money. They invest in programs and strategies to generate revenue, less the expenses. That’s what a referral program ROI is. It describes the amount of money a company makes by leveraging customer loyalty to refer new customers to the business.
Referral marketing relies on loyal customers to promote the brand to social contacts (i.e., family, friends, colleagues, business associates, and acquaintances). Businesses reward or incentivize customers for referring new potential clients. These activities entail costs.
On the other hand, referred customers allow companies to increase revenue. More importantly, the rewards given to existing customers serve as additional motivation for boosting referrals. It also encourages customers to remain loyal to the brand, allowing the business to grow.
The interplay between costs (i.e., rewards and marketing activities) and revenue (i.e., sales brought by new and existing customers) define the referral marketing ROI. Ideally, businesses strive for higher revenues relative to costs. The wider the gap between these two aspects, the higher the ROI.
How to Calculate Referral Program ROI?
Businesses have several ways to calculate the ROI to determine the effectiveness of referral campaigns. However, we will focus on two principal approaches.
Basic ROI
Basic ROI calculations give businesses an idea of their financial growth over a predetermined period. This method requires two things.
First, you need the referral revenue. This data includes all sales from referrals over a predetermined period. It could be monthly, quarterly, semi-annually, or yearly.
The second variable is referral cost. This value describes how much money you spend on running the program. Examples are marketing activities, reward payouts, and referral marketing software subscriptions.
The formula is as follows.
ROI = [(Referral-related Revenue – Program Cost) ÷ Program Cost] x 100
For example, suppose your customers’ word-of-mouth marketing referrals produced $100,000 in sales and about $15,000 in referral marketing costs last year. Subtracting $15,000 from $100,000 yields $85,000.
Next, we divide $85,000 by $15,000 to get 5.67. We must multiply this number by 100 to get the percentage growth. Hence, 5.67 x 100% is 567%.
Customer Lifetime Value (CLV) Based ROI
Although percentage-growth calculations are straightforward, they don’t offer insights into the value of new customers to the business. A more robust, albeit more complicated, measurement considers the average customer lifetime value or CLV.
This metric describes a single customer’s profitability. Customers continue patronizing a business by buying offerings or availing services until they call it quits. The sales a company makes from one customer throughout the latter’s relationship with the brand is the CLV.
Interestingly, referred clients post 25% higher CLV rates than non-referred customers.
CLVs are crucial to ROI calculations. These values underscore how much money a customer brings to the business. It creates a more accurate picture of the referral program’s effectiveness. The value also empowers brands to tweak their rewards program.
For instance, a positive ROI means the brand can improve its rewards. It has a sufficient budget to upgrade its incentives and enhance the referral marketing strategy.
On the other hand, a negative ROI value might require the business to check its reward system and marketing activities. The company is incurring more expenses than it generates revenue. Alternatively, the net loss could be that the campaign isn’t bringing much-needed new customers.
You can use the following formula to calculate ROI based on CLV.
ROI = (Referred Customers’ Average CLV x Number of Referrals) – Program Cost
The simplest method to calculate the CLV is subtracting the company’s customer acquisition costs from the overall revenue. Acquiring new customers entails sales and marketing expenses. Hence, you might want to determine how much you spent obtaining a new referred customer.
Add all costs incurred for all new referred customers and divide the sum by the number of referred customers. Doing so gives you the average CLV.
For example, suppose you spent $1,000 to acquire 15 new customers via referrals. Your average CLV would be $66.67 ($1,000/15 = $66.67).
Let’s calculate the ROI using the same example above.
Suppose the average CLV is $66.67, the number of referrals is 300, and the program costs $15,000. The CLV-based ROI in this sample is $5,001 ($66.67 x 300 = $20,001; $20,001 – $15,000 = $5,001).
Besides the basic and CLV-based methods, you can use a referral program ROI calculator to determine the program’s profitability. Please note that this tool requires additional data. For instance, you might want to determine the average value of first-time purchases, monthly customer growth, and current customer count.
Factors Affecting Referral Program ROI
Ensuring a successful referral program requires appreciating several factors influencing its effectiveness. Let’s look at three crucial attributes.
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Program Design
Your program’s effectiveness hinges on its quality design. It includes the program structure, customer targeting, and metrics tracking & measurement.
Designing a referral program requires creating an enticing referral incentive or reward. This tactic excites customers, enticing them to invite friends and colleagues to expand your company’s customer base.
For example, 93% of consumers love discounts. Hence, offering customers substantial price cuts on future purchases should be exciting when referring to social contacts.
Your brand’s referral reward system isn’t the only thing influencing program success. Referral process complexity is a significant factor, too.
For instance, do you have easy-to-spot, easy-to-use referral widgets? How about the referral landing page? Does it require too many data fields? You might want to consider social sharing buttons. The more social media platforms you connect with, the more invigorated your customers to refer to social contacts.
Another consideration is your customer targeting strategy. Do you have a clear idea of who your potential customers are? More importantly, are you reaching out to them via multiple channels (i.e., social media, blogs, emails, and live events)?
It’s worth remembering that a robust ROI requires more customers buying from you. Ensuring this objective would be challenging if you don’t target the right audiences.
Monitoring program-critical metrics is also essential. Although some businesses might opt for the old-fashioned data-tracking and measuring methods, you will have a more accurate and straightforward time with referral marketing software.
These technologies help brands measure and track crucial metrics. For example, they could monitor the program’s conversion rate, average CLV, revenue from referrals, participation rate, active engagement rate, cost, and referral rate.
The best part? Calculating the program’s ROI is a cinch with such technologies. You have all the information required. Making data-driven decisions should be easy.
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Market Factors
Two market factors can shape your referral program’s success. How well you manage these parameters can spell the difference between a positive and a negative ROI.
The referral market continues to surprise experts. It’s grabbing the attention and interest of top industry players and investors.
Although only three in ten companies have formally organized referral programs, the percentage could be higher. After all, 21 in 25 B2B businesses recognize the role of referrals in initiating the buying process.
Opportunities abound. But so do threats. General and industry-specific trends can derail your program if you don’t respond accordingly.
For instance, social media engagement is at an all-time high across industries. Seventy-seven percent of businesses are on various social media. They use this channel to find and engage potential clients. You can kiss goodbye to a lucrative ROI if social media isn’t part of your referral strategy.
The mobile-first approach is also gaining ground. The World Economic Forum says two in three people worldwide have a mobile phone subscription, accounting for about 5.4 billion. Over 5.35 billion people globally also access the internet.
And get this!
Forty-six in 50 internet surfers use their mobile phones. We have yet to include other mobile devices like tablets and laptops.
The point is that businesses must tailor their programs (including referral systems) to accommodate the trend of going mobile. Most consumers use such devices. And if your brand’s website or social media page isn’t mobile-friendly, there are chances of a higher ROI.
Competition is also growing fiercer. Nearly five million businesses enter the marketplace yearly. That’s eight to nine new businesses every minute. You could wait in line at Starbucks for five minutes, and 40 to 45 new companies crowd the market.
Your brand must stand out. Create a unique business identity to attract customers and leave the competition in the dust.
Modern consumers are becoming more selective. They know their wants and rights. They expect brands to deliver impeccable services and high-quality products at reasonable prices, no ifs, no buts.
Consumers love control. They will ditch a brand for another if they cannot get what they want from the former. Most buyers base their purchases on budgets and disposable incomes.
Hence, you might want to study your target audience’s unique characteristics and buying behaviors. It will help you create a more appropriate program and improve customer retention rates. That will drive your ROI higher.
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Program Execution
You can have a thoughtfully designed program for referrals. Unfortunately, executing the strategies and tactics is a different matter. How well you operationalize the activities can make or break your program.
Offering incentives and rewards to referrers can be an excellent referral marketing strategy. Unfortunately, how much you give ultimately decides whether customers would be willing to become brand advocates.
For instance, offering a 2% or $5 discount for qualified referrals might seem good enough. However, increasing the cash reward to $10 or 5% is better. Customers are more likely to become advocates if the reward is more appealing.
Promotional activities also matter. Marketing your referral system on your website can produce results. A more effective approach is to promote the program on all channels. For example, you could leverage social media, industry events, and emails.
Please don’t forget customer service and support. After all, referral programs leverage customer trust.
How can existing customers stay loyal and continue supporting your brand if you cannot deliver top-notch customer service? How satisfied are they with your brand? Is resolving a customer issue easy or a headache? What’s your company’s Net Promoter Score?
We must reiterate that excellent customer service equates to happy customers. Happiness begets trust in your brand, making customers stay loyal. That increases CLV and ROI. Neglect this attribute, and you can see your ROI slip.
Success-Proven Strategies to Improve ROI
Considering the factors influencing referral programs and appropriately managing them ensures success. You can also implement the following strategies to boost ROI.
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Optimize program design
Try to study and appreciate your target audience’s unique characteristics. Learn their buying attitudes and behaviors to create a more responsive referral strategy and tactic. And that includes audience-centric incentives.
For example, if your target audience prefers percentage discounts to cash, you can tweak the rewards strategy to accommodate such an observation. Consider other meaningful incentives to entice audiences to become customers and advocates.
Make referring simple and convenient. Analyze your referral widgets and landing pages. Are they easy to spot and easy to use? Do you require referrers to input unnecessary details?
We recommend A/B testing program elements to determine which are more effective. You will want to optimize the program design to improve referral results.
More importantly, use software and other technologies to track and measure critical metrics. For instance, monitoring referral rates will help you know whether the program is effective.
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Leverage automation and technology
Referral software can simplify processes. You can create and launch a more responsive program to attract customers and reward them for their referrals.
Monitoring and measuring crucial metrics is also more convenient with such technologies. Business owners can decide whether to modify a strategy or change it altogether. Data from these technologies can also motivate brands. It enables companies to develop more loyalty-boosting strategies.
Communicating and engaging customers and advocates is also easy. You could automate sending thank-you emails, rewards updates, and promotional gimmicks. Customers will love your brand for keeping in touch, although you use machines to deliver these things.
Technologies also enable advocates to produce a unique referral code effortlessly. They don’t need programming proficiency to create links. Referring friends and social contacts should be a walk in the park.
Automation and technology are a business owner’s best friend in ensuring success.
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Invest in marketing and promotion
Although these promotional and marketing strategies cost businesses some money, they are essential.
The good news is referrals don’t cost brands a fortune. They leverage customers’ loyalty and trust to recommend social contacts to become new customers.
Having said that, we recommend analyzing your promotional and marketing strategies. Ensure the results are higher than the costs to make them cost-effective.
For example, social media promotion is free unless you pay for ads. Email marketing also doesn’t cost you a dime. Even if you spend, the ROI is higher than other channels. Experts say a dollar spent on email marketing gets the company $36 in return.
Moreover, investing in cost-effective email marketing and promotional strategies can also improve the company’s customer retention rate. Customers will be happy to receive and open your email, especially if it contains reward offers. That will make them want to stay with your brand longer.
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Prioritize customer experience
Most businesses focus on high-quality offerings. They seem to forget that modern consumers are more empowered than 20th-century customers. Although price, quality products, and customer service remain vital, many customers today emphasize positive experiences.
They expect positive interactions with brands on social media. Customers want their opinions heard and considered in business decisions.
Even posting a referral link matters to advocates. For example, a broken link will dissuade a customer from referring social and business contacts to your brand.
So, imagine yourself as your brand’s customer. Think about how you want the company to treat you. Learn your customers’ passions, beliefs, viewpoints, sentiments, and interests. Use them to create strategies for delivering a positive customer experience.
Conclusion
You deserve a lucrative ROI or profit from your referral marketing strategies. Although calculating ROI is easy, increasing revenues and minimizing costs are top-of-mind objectives.
Strive to excite customers and make them happy to become loyal clients. The happier and more satisfied they are with your brand, the more willing they are to become advocates, ambassadors, and promoters. It will lessen expenses but boost revenues, two things crucial to a healthy ROI.
