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.
What is customer referral value?
Customer referral value is the monetary value of customers gained through referrals, as compared to the value of customers acquired in other ways.
The return on investment from referrals is typically 3-5 times greater than that from non-referred customers. By measuring the customer referral value, businesses can identify their most valuable contacts and work on retaining them. Your assessment of referral value is only complete, though, when you compare it with the value of customers acquired through traditional marketing.
Ways to increase customer referral value
Given the many benefits of referrals, businesses must take steps to increase the referral rate. That essentially means increasing the revenue brought into the business by referred customers. And the way to achieve that is by increasing successful referrals. Here’s how you can go about it:
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.
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.
The viral referral loop
Businesses can effectively market their products by leveraging the viral referral loop. As a marketing strategy, the viral loop refers to a phenomenon that involves one customer referring another in an endless cycle of referrals. It takes advantage of human sharing to drive customer acquisition and increase brand awareness.
A referral program is more likely to create a viral loop. It starts with one customer referring a friend to your business. Once the referred customer tests your products and likes them, they refer their friend or colleague. The cycle continues with each new customer referring another customer. Thus, a referral becomes valuable to your business both as an individual and through the value brought by the customers they refer.
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.
Invest in the right referral software
Referral software tracks all the metrics you need to determine referral value, so you have full visibility on your program. This way you can see whether your program needs improvement and take the steps to improve it.
The right referral software will help you customize the program and rewards structure how you desire, encourage more referrals through automated engagement, track referral metrics in detail, and integrate with your existing processes.
Referral Rock referral software helps you put your referral program on autopilot, by automating tasks like distributing referral links, issuing rewards, and keeping referrers engaged.
It’s flexible enough to run advanced referral reward structures, boasts robust referral tracking, and has 30+ integrations. Plus, dedicated onboarding specialists will assist you with every step of setting up your program.
Compare customer lifetime values
One way to calculate the customer referral value is to find the average lifetime value of all your referred customers:
Here’s what this customer lifetime value calculation looks like in formulas:
Average Customer Value = [Average Purchase Value x Average Purchase Frequency] – Average Customer Acquisition Cost
Customer Lifetime Value = Average Customer Value x Average Number of Years Customers Stay
For example, if a business has an average purchase value of $10,000, an annual purchasing frequency of 3, and an average customer acquisition cost of $5,000, the customer lifetime value is [10,000 x 3] – 5,000 = 30,000 – 5,000 = $25,000.
The resulting figure is the average customer value. Multiply that by the average number of years individuals remain customers. That should give you the referral customer lifetime value.
For non-referred customers, the formula above is also applicable. Calculate the average purchase value and multiply it by the customers’ average purchase frequency. Subtract the average customer acquisition cost and multiply the resulting value by the average number of years a customer remains loyal.
Compare this figure with the referral customer lifetime value to see which is better. The same formula is also useful in calculating the overall customer lifetime value before and after starting the referral program.
Look at the average referral value
The third way to calculate customer referral value is by determining the average referral value. Start by determining the average order value of referred customers and multiplying it by the average number of years referred customers stay loyal. Subtract the average cost of the referral incentive. The following is an illustration of the formula:
Average Referral Value = [Average Order Value of Referred Customers x Average # Years Referred Customers Stay Loyal] – Average Cost of Referral Incentive
