The existing trust and loyalty of customers come quite in handy, when there’s a new project on the docket. All you need is a referral marketing program to channel those positive sentiments within their social networks, gather new leads, and expand your customer base.
With its ability to nurture - new and existing - customer relationships and drive organic growth to a company’s user base, referral marketing has become a talking point in the business circle.
After all, the strategy has fared incredibly for many businesses. Dropbox, for instance, achieved a 3900% growth rate within the first 15 months of its referral program going live. Or Robinhood, which acquired 1 million signups on its website before launch.
As inspiring as they might be, imitating their success for your business would be a no-win unless you operate with the same resources, expertise, and human capital. Instead of benchmarking your referral ROI against the market hits, locate your direct competitors and identify what’s their actual revenue turnover.
This guide post enlists everything from defining the average referral marketing ROI for major industries to describing effective ways to calculate yours.
How Much Does a Referral Program Cost?
Even though referral programs do not require any upfront costs, like other mainstream advertisement channels, you cannot implement one from the get-go. As straightforward as the program may seem, developing proper infrastructure and introducing enticing rewards does require in-depth planning, especially budgeting.
Outlining the costs of your program beforehand prevents overspending and keeps you in line with your revenue goals. However, there’s no exact estimate of what the ideal referral program cost should be. Rather, it depends on several underlying factors such as customer lifetime value, cost of incentives, and referral software.
Program Planning and Management
Any marketing strategy put into effect without proper planning is bound to lose traction along the way - and referral programs top that list. Startups with limited financial resources often direct their in-house marketing or sales team to plan and manage the program, instead of hiring dedicated full-time employees.
But for companies that have their docket full with other development operations, hiring a dedicated referral marketing agency can be a suitable option. While there are quite a few options available, Prefinery offers the most cost-effective packages to plan and run your pre-launch and post-launch referral campaigns.
If you’re taking the DIY route you may need to calculate the hourly rate for the time your team spends on the referral program. On average, the planning and management tasks take around 30% - 40% of an employee’s time. Considering the average hourly rate of $40, the estimated monthly cost for one employee will comprise up to $320 per month.
Cost of Referral Rewards
While rewards may appear to be a costly liability for any marketing strategy, they are in fact, the most budget-friendly tactic to gather new customers. But not all referral rewards are the same.
A high-value reward like a cashback or discount might attract more referrals short term, but it could also strain your budget. Alternatively, low-value or non-monetary incentives such as exclusive access or loyalty points might not entice your audience as much but are perfect for gearing your campaign on a tight budget.
Keep the following things in mind, while determining the reward for your referral program:
- Understand consumer motivations and preferences. Some customers might be more motivated by discounts or cash rewards, while others might appreciate exclusive experiences.
- Research the industry standards for referral incentives. Identify what your competitors are offering, and the response they’re getting in return.
- Consider the lifetime value of the referred customers. If the referred customers have a high potential for repeat business, you might be willing to invest more in incentives.
- Outline your campaign goals. If you aim to drive immediate sales, monetary rewards will be more effective whereas, if you're focusing on building long-term relationships, non-monetary incentives could be appropriate.
Referral Program Software Pricing
Even with a limited customer base of, let’s say 100, managing your program procedures manually using spreadsheets can be physically and mentally draining. Not to mention, the risk of human error that may cost you credibility.
That said, what happens when your user base expands to 1,000 or 10,000? Letting everyone hear and learn about your referral campaign, participate in the program, and register their leads manually would be next to impossible - that’s where referral program software comes in.
Referral marketing software is a specialized digital tool designed to automate, manage, and optimize referral marketing campaigns. From tracking potential customers to assigning leads to referrers, this specialized software can manage operations incredibly faster. But it comes at a cost. Some mainstream pricing models for referral software are:
- Subscription-Based: You pay a recurring fee, typically on a monthly or annual basis, to access the software and its features. This model is suitable for businesses looking for ongoing referral program management.
- Tiered Pricing: As you move up the tiers, the cost increases, but you gain access to more advanced features. Choose the tier that aligns with your program's requirements or your customer pool.
- Pay-as-You-Grow: Some software solutions offer pricing that scales based on the number of participants, referrals, or conversions in your program. A perfect option for businesses that are just starting or have fluctuating referral activity.
While pricing is a significant consideration, focus on the long-term return on investment (ROI) your referral program software can deliver. A platform that effectively boosts referrals and helps you achieve your business goals can justify its cost.
How to Calculate the Referral Program ROI?
When you run a referral program, you're giving rewards to people who bring you new leads. But to ensure you're not spending more on rewards and referral software, than what the referred customer brings in, you must calculate the ROI.
Knowing the ROI can help you determine whether the resources, time, and budget invested in your referral program are justified. If the ROI is positive, it validates the allocation of resources. If it's negative, you can identify areas for improvement reconsider the program's design, or restructure the rewards.
We have outlined several ways to calculate referral marketing ROI, you can choose one that best fits your business credentials.
Standard Referral ROI formula
A quick bit about assessing the financial performance of your referral program and determining its potency in generating profits without going into the nitty gritty. The formula states:
Referral ROI = (Net Referral Revenue - Referral Program Costs) / Referral Program Costs * 100
Here’s a quick breakdown of all the values involved:
- Net Referral Revenue: Net Referral Revenue refers to the total revenue generated through the referral program minus any associated costs related to those revenues.
- Referral Program Costs: Referral Program Costs encompass all the expenses directly related to running the campaign including incentive costs, management costs, marketing and promotion, and software costs.
Let's say your referral program generated $20,000 in net referral revenue and incurred $5,000 in referral program costs.
Referral ROI = ($20,000 - $5,000) / $5,000 * 100 = 300%
In this perspective, referral ROI is 300%, which means that for every dollar invested in the referral program, you're getting a return of $3.
It's worth noting that calculating Referral ROI accurately requires comprehensive data on referral revenue, program costs, and associated variables.
Calculating Overall Referral Revenue
Every incoming customer means business - and more so, in terms of referral marketing programs. Unlike the ones acquired through other channels, referred customers spend more, stick longer, and refer your products within their associated networks. While a smart calculator can offer you accurate conversion rates per referral, here's a direct way to calculate the overall referral revenue is:
Direct Referral Revenue = Number of Referred Customers x Average Transaction Value
If, for example, you generated 50 customers through your referral program and each lead makes a transaction of $100, your direct referral revenue would be $5,000.
Calculating the Referral Reward Value
Ideally, the referral rewards you offer should compensate for the time and effort your customers put into bringing new leads to your platform. To entice your prospect into taking the leap of faith in your brand, make sure you offer them something equally rewarding.
Before calculating the actual monetary value of the reward, it's important to understand the perceived value from the customer's perspective.
One approach to calculating referral reward value is to base it on the customer's lifetime value (LTV).
Referral Reward Value = LTV x Reward Percentage
Let's assume your business has calculated the average customer's LTV to be $500. You want to offer a reward of 10% of the LTV to customers who successfully refer others.
Referral Reward Value = $500 x 0.10 = $50
Calculating Customer Acquisition Costs (CAC)
CAC is the total cost incurred to acquire a new customer through your referral strategy. This includes all expenses related to running the program, such as incentives, marketing costs, program management, and technology expenses.
CAC = (Total Referral Program Costs + Total Marketing Costs) / Number of Referred Customers
If your program costs include $2,000 for referral rewards and program management, and you've spent an additional $1,000 on marketing to promote the program. You've acquired 50 referred customers through the program.
CAC = ($2,000 + $1,000) / 50 = $60
Once you've calculated CAC, you can compare it to the revenue generated from referred customers to measure the referral ROI.
Referral ROI = (Net Referral Revenue - CAC) / CAC * 100
Continuing from the previous examples, let's say the net referral revenue generated from the 50 referred customers is $10,000.
Referral ROI = ($10,000 - $60) / $60 * 100 = 16,566.67%
Keep in mind that both CAC and referral ROI can change over time as your program evolves and customer behavior shifts. Regularly monitor these metrics and analyze changes in the referral program's performance.
Calculating Customer Lifetime Value (LTV)
Measuring a customer’s overall association with your brand is one way to gauge their impact on your business. Customer Lifetime Value represents the projected total revenue (purchases, repeat transactions, and potential upsells) a customer will generate during their engagement with your business. Before we delve into the referral ROI, let’s first calculate LTV:
LTV = Average Purchase Value x Number of Repeat Purchases x Average Customer Lifespan
Assume your average purchase value is $50, customers make 4 repeat purchases on average, and the average lifespan of a customer is 2 years.
LTV = $50 x 4 x 2 = $400
Meaning that said customer has brought over $400 in revenue. To calculate the referral revenue you need to multiply the number of referred customers with their lifetime value.
Suppose your referral program has brought in 30 referred customers.
Referral Revenue = 30 x $400 = $12,000
Referral ROI is calculated by comparing the referral revenue with the costs incurred to run the program.
Referral ROI = (Referral Revenue - Referral Program Costs) / Referral Program Costs * 100
Under the same context, the total referral program costs, including rewards and management, amount to $2,000.
Referral ROI = ($12,000 - $2,000) / $2,000 * 100 = 500%
Calculating Average Value per Transaction (AVT)
The average value per transaction represents the typical amount of revenue generated from a single customer transaction. One way to know this is:
Average Value per Transaction = Total Revenue / Total Number of Transactions
Considering your business has generated a total revenue of $10,000 from 200 transactions the AVT will be $50. Multiply that by the number of referred customers to calculate the referral revenue. So, if you’ve brought in 30 referred customers, the revenue will be $1,500.
To calculate the ROI:
Referral ROI = (Referral Revenue - Referral Program Costs) / Referral Program Costs * 100
Let's say the total referral program costs, including rewards and management, amount to $500.
Referral ROI = ($1,500 - $500) / $500 * 100 = 200%
Meaning for every dollar spent on the program, you’ve generated an ROI of 200%.
Calculating Customer Retention and Turnover Rate
Customer retention rate is the percentage of customers who continue to do business with your company over a specific period, let’s suppose, a year. The equation would be:
Customer Retention Rate = ((Customers at the End of the Period - New Customers Acquired) / Customers at the Start of the Period) * 100
For example, if you started the year with 500 customers and acquired 100 new customers throughout the year. At the end of the year, you had 450 customers still active.
Customer Retention Rate = ((450 - 100) / 500) * 100 = 70%
The customer turnover rate or churn rate is the opposite of the retention rate, representing the percentage of customers lost over a specific period.
Customer Turnover Rate = (1 - Customer Retention Rate) * 100
In the previous example, where the retention rate was 70%, the turnover rate would be 30%.
Attribution-Based Referral ROI Calculation
Attribution-based referral ROI provides insights into how your referral program contributes to revenue across the customer journey. It acknowledges the program's influence on customer interactions beyond the initial referral link click.
To gather insights into their behavior you should choose an attribution model that best reflects how your program interacts with other marketing channels. Common attribution models include:
- First-Touch Attribution: Attributes all revenue to the first interaction the customer had with your business, which could be through a referral link.
- Last-Touch Attribution: Attributes all revenue to the last interaction before the conversion, which might involve a referral link.
Based on the attribution model chosen, allocate a portion of the revenue to the referrals that contributed to the customer's journey. For example, if using first-touch attribution, the entire revenue from the customer's first interaction could be attributed to the referral. Now calculate the referral ROI by comparing the attributed referral revenue to the costs of the referral program.
Referral ROI = (Attributed Referral Revenue - Referral Program Costs) / Referral Program Costs * 100
Referral marketing is a natural fit for businesses with a thriving niche community. Companies with an active consumer base or enthusiastic fans are better off with referral programs featuring a typical referral ROI between 15% to 25%.
But that doesn’t mean you can leverage referral programs to build up hype around your upcoming launch. With successful referral program examples from various industries, you can certainly devise a word-of-mouth strategy that works for your brand.
But like any marketing strategy, you need some hard evidence in the form of revenue or referral ROI, to make referral programs your prime customer acquisition strategy. Sign up with Prefinery.com to ensure your next launch takes off successfully.
What is the typical range of referral marketing ROI across industries?
Referral marketing ROI can vary widely across industries due to factors like customer behavior, product types, and referral program designs. However, a rough average range is between 10% to 25%. Some industries with strong customer loyalty or high engagement might even experience higher ROI.
How can I measure the success of my referral program's ROI?
To measure the success of your referral program's ROI, calculate the net referral revenue (revenue from referred customers minus program costs) and divide it by the program costs. Multiplying the result by 100 gives you the ROI percentage.