Examine the viral loop
You might also examine the customer lifetime value, or yearly revenue, specifically of referred customers who successfully bring in other customers. Add up the value of these customers and the customers they brought in.
This doesn’t show your business’ full referral value, but it does focus in on the impact of those referred customers who have become advocates and continued the viral loop.
Why referral programs are important
Referral programs can be extremely effective when strategically planned and implemented. Here are three benefits to referral programs for retailers:
Referral marketing is effective in optimizing conversions, with data indicating referrals are twice as likely to convert as leads from paid marketing channels, including social media marketing and traditional marketing like television and radio ads. New customers earned via referral have pre-established trust in your brand.
It’s expensive to market and promote your brand and products. The more you can reduce these expenses, the lower your customer acquisition costs become, and your profit margins grow.
Plus, many shoppers are willing and eager to share their experience on your behalf—at no out-of-pocket cost to you. More than three-quarters of customers are willing to refer a friend after a good experience with your business.
Incentivized referrals
The most popular type of referral is incentivized, meaning a customer has a reason to refer your products to their personal network. In return for the referral, the existing customer may receive a discount on their next purchase, a complimentary product or service, or a cash incentive.
Lifestyle brand Erin Condren offers a double-sided referral program: giving a $10 coupon code for referred customers to use on their first purchase, and a $10 equivalent in 1,000 EC Insider points to the person making the referral.
Direct referrals are when your existing customer base actively refers your company to people looking for a product or service you provide. It’s the most traditional form of referral.
There’s not necessarily an incentive for the referrer to act; typically they are just genuinely happy with the product and are willing to share it with others.
Reputation-based referrals are when you have built a brand with such a strong reputation that people are confident in mentioning you to someone looking for the products or services you offer—even if they haven’t bought from you themselves.
While it’s a good target to aim for, it’s not necessarily easy to get these types of referrals. They happen as an indirect result of having great products and a strong brand reputation.
How to calculate customer referral value
Every business owner should know how to calculate customer referral value. This will help them determine how much they can sell thanks to referred customers and the resulting returns on investment. The following are the three most effective methods.
Invite previous customers to join the program
Loyal customers make the best referrers because they are already familiar with your brand and its reputation. Invite them to join your referral program using email marketing.
Start by sending a broadcast to announce your new program and any incentives. Most referral marketing tools have an email feature to send a customer’s unique referral code or link without participating in a signup process.
A best practice is to continue promoting your referral program by mentioning it in your purchase confirmation emails—when customer excitement is fresh. Consider using the footer of the email to invite new customers to join your referral program.
Focus on social media referrals
Encourage customers with a great experience with your brand to tell others about it on social media. This method is effective in reaching many potential customers at once, as people naturally share with many friends at once on social. Promoting your referral program on social media can help you to generate increased revenue from new purchases.
Be sure to track the impact of their actions using suitable referral software. Referral Rock software makes it easy for customers to send trackable referrals on social media, and get rewarded.
Use strategic rewards
It’s more effective to increase customer referral value by rewarding referrers as well as the referred leads. This is known as a double-sided reward structure.
For example, you could give gift certificates or cash awards to referrers. But for the referred leads, a reward related to your brand is more appropriate. It could be a discount, free products, or credit to encourage referred customers to purchase your products.
Then, once referred customers refer their own peers, they can earn further referral rewards which encourages them to be repeat advocates themselves.
Add yearly revenue numbers
You can also check the referral value by adding up the total revenue from referred customers within a year. Subtract the referral program annual cost, which could include advocate incentives and referral software subscriptions. After subtracting the costs of acquiring referral customers, you will get the net referral revenue. Here is a simple formula:
Net Annual Revenue from Referred Customers = Total Revenue from Referred Customers – Annual Cost of Referral Program
For example, for a business with $100,000 in total revenue from referred customers and $25,000 in annual cost of the referral program, the net annual revenue from referred customers will be 100,000 – 25,000 = $75,000.
Compare the net revenue from referred customers to that from the non-referred customers. To calculate the net revenue from non-referred customers, subtract the acquisition costs from the total annual revenue.
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Compared to non-referred customers, referrals tend to be more profitable thanks to their increased lifetime value. Referred customers generally tend to view a business as more trustworthy and credible. The referral method is also more cost-effective and more likely to have a viral effect. All business owners and marketers need to know how to calculate customer referral value to monitor performance.
This article discusses the need for a higher customer referral value and how to calculate and increase it. Read on to learn how to effectively establish a standout customer referral program.
Focus on customer satisfaction
Customers are more likely to recommend brands about which they feel 100% satisfied by. So, create an unforgettable customer experience. A report in Forbes suggests providing responsive customer service, as customers will be more likely to talk about your business if you respond to their needs promptly. Also, build effective feedback loops through which you can get feedback from customers, and promptly act on it.
Having a satisfied and loyal customer base could benefit your business in many ways in the long run. It could lead to an improved brand reputation, increased customer loyalty, a reduced customer churn rate, and improved revenues and profits.