October 16, 2017
Offering an incentive for existing clients to refer new ones is a fantastic way to acquire customers. Sounds easy, but the question remains: What’s the ideal incentive structure for customer referrals?
The simple answer is to keep it simple and realize there’s no “right” way to do it. Each company must find a structure that fits it best. While some companies are growth-at-all-costs when it comes to customer acquisition, others focus on margins.
Identify key performance metrics such as signed agreements that are closer to the purchasing stage. Those metrics align with more high-ROI incentives, which will allow your company to craft incentives that suit your organization as it scales and that motivate brand ambassadors to refer top-notch new customers.
Incentive programs should be uncomplicated, so try a give-get model that rewards customers with simple incentives like cash, a Visa gift card, or a discounted subscription fee. The primary objective should always be to drive specific behaviors such as customer referrals.
Making it simple for a customer to share is key. Tactics as easy as filling in referral sheets beforehand and providing real-time notifications leave potential advocates with one less hurdle to clear, meaning they’re likelier to spread the word.
When crunching the numbers on your incentive structure internally, compare the value delivered by a referral channel against other customer acquisition channels. You can get to that information by asking these pointed questions that compare channel efficiency and determine further scaling opportunities:
What is the current cost of customer acquisition? Consumer acquisition cost provides a scalable, reasonable amount to spend on incentives for new customers. Calculate all the costs associated with paid search. This customer acquisition cost shows what each customer (on average) costs from pay-per-click and helps identify the most economically viable incentive for both your company and the customer.
Companies sometimes spend $500 on an ad to acquire a customer but think $100 is too much to pay someone who refers new business. Decide whether you’d rather invest in existing customers or pay Google for ad clicks.
What is the average conversion rate per channel? According to my firm’s research, referred customers close at a rate of one in seven, a rate significantly better than non-referred customers. All of this close-rate information can be tracked using a software platform.
Access to this information provides an opportunity to dig deeper and learn why conversions rise and fall. If referred customers aren’t closing expeditiously, the incentive likely isn’t attracting the right ambassadors.
What is the lifetime customer value? Successful businesses thrive on repeat customers. Always keep an eye on lifetime customer value, or how much revenue a customer generates over the span of the relationship.
Because referrals are proven to close faster and generate more revenue, companies should invest in referred customer and other channels equally. Many companies consider only their outlay, but if a company pays $500 per customer on paid channels, it can (and should) consider a comparable offer for referrals.
For example, suppose a B2B software-as-a-service company knows that its customer lifetime value is $25,000 and that demos cost it roughly $1,000 each through its normal paid channels. If the company also knows that 1 in 10 customers come from demos, paying customers $500 to refer others to those demos becomes a great deal, cutting the customer acquisition cost in half.
Consider your incentive structure in a way that reflects your company’s goals. Keep it simple, and choose the one that will scale with your growing business.