Startups usually have a limited marketing budget, but a successful referral program can bring you many clients without having to pay anything up front. Therefore, minimizing the risk of investing large amounts in marketing and not having the desired effect. A referral program can also be dangerous if it is not well structured.
As defined by Alegra , a referral plan consists in that, through certain incentives, you can motivate your potential clients, your community, contacts. In addtion, any stakeholders you want to impact, receiving in exchange recommendations from them towards your brand, product or service.
Therefore, I leave you a guide based on my experience as founder of Prestadero.com of what you must take into account for your program to be a success.
Set the referral reward amount
This is one of the key points of any referral program: what will be the reward for referring customers? The reward should be attractive enough for the program to work. But not so aggressive that you run out of funds.
In order to establish a reward, I recommend that you have your CAC (Customer Acquisition Cost) and your LTV ( Lifetime Value) on hand. For example, let’s say you have a scented candle e-commerce. You spend $ 10,000 a month on advertising, resulting in 10 new customers buying your candles. In a simplified way, then, it costs you $ 1,000 (investment / # clients) to acquire a new client. Now, suppose you have a 50% margin on candle sales, and that, on average, a customer (throughout his life, not necessarily on the first sale) spends $ 5,000 on candles. So 50% of $ 5,000, or $ 2,500, is the LTV. Even if you divide LTV / CAC ($ 2,500 / $ 1,000), you would have a ratio of 2.5; Or, put another way, you get 2.5 times in gross profit of what you invest in advertising.
Although this reason sounds attractive, you have to remember that this value is during the life of the customer and the usefulness can be achieved after several months or years. In addition, you have to consider that these reasons are often not arithmetic in relation to the amount invested in marketing. That is, if you invest $ 1,000,000 a month in advertising, the LTV would hardly be $ 2,500,000 (ratio of 2.5) because your CAC varies with different orders of magnitude in advertising investment.
So what should be the ceiling of your referral program? In my opinion, the ceiling should be $ 1,000 (your current CAC). However, there are startups that very aggressively set a ceiling on LTV, or $ 2,500, perhaps in order to show more traction to potential investors. While this second strategy may show higher growth, it is very risky and can quickly bankrupt you.
On the other hand, any amount under $ 1,000 (your current CAC) is very valid, making a more subjective analysis of whether said reward is attractive to be recommended. I would not recommend a reward with a cost greater than the LTV ($ 2,500), although it is very common for aggressive entrepreneurs to do so, with the often unfounded desire that greater traction or customer base will lower their CAC and / or increase their LTV.
If you take a more conservative approach, you can set your ceiling as the average gross profit from a customer’s first purchase (not from their LTV). For example, if on average a customer spends $ 1,500 on their first purchase and your margin is 50%, your conservative ceiling could be a reward of $ 750.
The reward must generate value
Avoid offering rewards that don’t add value to the business. For example, if you pay rewards simply for signing up for your candle e-commerce (not for making a purchase), then you run the risk of being abused and quickly bankrupt.
Fulfills what was promised by the referral
Establish the rules of the game clearly and communicate them in advance. You should at least consider 1) the amount (or prize) of the reward; 2) at what point a referral qualifies for the promotion (for example, by making a purchase, or by making a minimum purchase of X); 3) when will you pay the reward once the event takes place (at the moment, at the end of the month, etc.); 4) the limit, if any, of how many people you can refer (if the cost of the reward is well established and conservative, you do not have to set limits); 5) the way you will identify the referrals (for example, using a link or a specific code); among others that apply to your business (such as the cancellation of the reward in case of returns)
Once the rules are established and communicated, then you must comply with what was promised or they will stop trusting you and your startup, and it is a very effective and fast way to generate enemies and detractors that harm your company
Make it easy for them to refer you
Set up mechanisms, or ideally automate, the referral process so that referrers (or hosts) can refer easily and transparently. For example, establish codes or a unique link that can automatically identify the host and the referral. Plus, this has the added benefit of being easy to share.
At Prestadero.com, we have a unique link per user so that we can automatically detect the host. This has the added benefit that the host can easily share their link (via email, WhatsApp, Facebook, etc.). Also, you avoid that the referral has to enter manual codes and minimize uncomfortable requests: “it is that it is my referral, but he forgot to put my code”.
Reward for referral, no contest or raffle
In our experience, guaranteeing payment of a reward for a qualifying referral is more effective than running a “contest” where only the one who refers the most wins a prize (even if the prize is higher). The uncertainty of whether you could be the winner diminishes the motivation of your hosts, as they may struggle to refer clients without receiving anything in return. However, in addition to the guaranteed reward, you can establish such a contest, so that in addition to the reward for referral your hosts can compete for a higher reward than the one referred more during a certain period. Avoid sweepstakes at all costs, it does not generate trust, in addition to having regulatory and tax implications in Mexico
Unilateral or bilateral reward?
Your referral program can reward only the host or the guest as well. For example, as a host you will receive $ 1,000 for each referral who makes a purchase (unilateral), and also your guest will receive a $ 200 discount on their first purchase (bilateral). It may be more attractive if you can offer something to both parties of the program, but keep in mind that the cost of the program can be more expensive if the reward is bilateral
The reward must be generalized and easily distributable
Avoid rewards that only apply to a niche of people. For example, a massage at the spa on the corner, or a discount at restaurant “x”, will be attractive and applicable to only a few. The most attractive thing is to pay the reward in “cash”, but you have to consider how to make the distribution and that this would not be a deductible expense for your company
You can also think of gift cards from Amazon, Liverpool, Starbucks, Netflix subscriptions, among others, which may be more applicable and easily distributable. Yes, you can offer credit in your own business, such as $ 1,000 off your next purchase of scented candles. Although here you would be benefiting in addition to an additional purchase on your portal and in reality your cost would be $ 500 (because you have a 50% margin on your candles), in my experience it is not a reward that is very attractive to potential hosts.