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.
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.
Trust and credibility
Referrals are a powerful tool for building trust and credibility with leads for any business. As they tell others about your business, they help you demonstrate your expertise, value, and results. Thus, it’s easier to overcome skepticism and objections from potential customers.
If anything, referrals talk positively about your business because they trust it to deliver the promised results. They want their contacts to also experience the same results. So, they advocate for your business among their friends. Besides, 74% of consumers say they’re influenced by word-of-mouth to make purchasing decisions because of the trust they have in their referrers.
Additionally, a referred customer will likely be more loyal than a customer acquired in any other way. According to a study by the Wharton Business School, referred customers have an 18% lower churn than other customers. They stay because their referrers are staying anyway.
Plus, whether on social media or by word-of-mouth, people tend to follow other people’s opinions or actions in unfamiliar or uncertain situations. This is called social proof. After hearing from their friends and family members, potential customers trust you and are willing to try or purchase your products.
The typical referral program costs much less than traditional methods of customer acquisition. On average, the customer acquisition cost for referred customers is at least $24 lower than traditional advertising. Since each referred customer is more profitable by at least $0.45 daily, they result in a higher return on investment.
Since they tend to stay for longer, referred customers have a higher lifetime value. It works simply. A customer who advocates for your brand will more likely make multiple purchases. Plus, these customers stay in your business for longer.
According to the Wharton Business School study, referred customers have an 82% likelihood of remaining active after more than 33 months. Thus, they have a longer customer lifecycle, especially if you reward them for every referral they make.
Finally, the average order value for referred customers is higher than for non-referred customers. As first-time customers, they are four times more likely to purchase. Their likelihood to make another purchase is higher by 54% and they have a higher order value of 34% compared to non-referred customers.
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
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.
Make referring as simple as possible
Customers should be able to find your program and refer in as few clicks or taps as possible. Then, once they’re on the program page, clearly explain how the program works in just 3-4 easy steps. Ensure the sign-up form doesn’t demand too much information.
Even better, link the referral program to the customer’s brand login information so they can start sharing right away, without registration. Or, send them dedicated links for automatic access to the program, without the need for any manual login. Select referral software programs, like Referral Rock, have this valuable feature so you won’t miss out on referral opportunities.
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.
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.
Why are referrals so valuable?
Compared to traditional methods of client acquisition, referrals can make your target audience view your company as trustworthy and credible. A referral strategy is also the most cost-effective way to acquire customers. Plus, there’s a strong likelihood that referred customers will also refer their friends and family. Let’s dive into three reasons why referred customers generate a high value.
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.
