There is not a standard number or rate that determines whether a referral program is effective or not. Whether or not your referral program is deemed successful is largely dependent on your business.
Measuring the ROI of your Referral Program
A simple way to determine the ROI of your referral program is to compare the total cost of running your referral program (cost of software + member/referral reward spend) to the revenue produced by your referral program.
If your program’s sales revenue is higher than your spend, then your ROI is positive.
You can use our spreadsheet calculator to easily calculate your referral marketing ROI. After inputting your customer data, you can see the projected ROI that a customer referral program or partner referral program can bring to your business.
Measuring the Customer Lifetime Value of a Referral
Another common way to prove that your referral program is yielding a positive result, is by measuring the Customer Lifetime Value (or CLV) of referrals vs customers acquired through other marketing strategies.
CLV is defined as the profit a business makes from a given customer, throughout their entire time as a customer.
Referred customers have, on average, a 25% higher CLV than other customers.
To estimate CLV in the simplest way, subtract the acquisition cost of an individual customer from the revenue your company has earned from that customer.
Total customer revenue – customer acquisition cost = CLV.
To measure CLV of your referrals as a whole, do a regular analysis (i.e. every 6 months) to look at the long-term value (LTV) of a referred customer and compare it to the cost of acquisition (Sum of rewards paid to the Member and Referral).
You'll want to see how the CLV of Referrals compares to your non-Referral customers. Knowing the cost of acquisition will help compare the cost to other marketing funnels available to you. This could also help to inform the amount of rewards you're willing to pay for a Referral if you find their CLV is higher, lower, or the same as your other marketing funnels.
Other Metrics to Track
As with all marketing channels, it is important to track certain metrics in your referral program over time, in order to determine if your referral program is effective or if you need to refocus on optimizing certain areas.
We highly recommend tracking the following metrics over time:
Number of new Members per month
Number of new Referrals per month
Conversion Rate (Referral page views divided by referrals)