5 Metrics to Measure Referral Program Success
I joined Facebook in August 2010 and yes, just like most of you, there was a time when I’d post only to chase likes.
Each notification worked like magic because the feeling of knowing that my friends are interacting with my content made me happy.
Fast forward to 2023, the story remains the same but the content success metrics? Whew! That’s now so much more than likes.
For example, when I post social media content, I analyze shares, saves, comments, video watch time, and whatnot.
When I write, I check unique views, link clicks, traffic, and the list goes on for various marketing verticals but why am I telling you this?
It’s because in my previous articles, I’ve told you about various parameters of building a referral program and now we must understand if it’s even working.
Not analyzing the success of referring marketing efforts is like taking a shot in the dark. So to ensure that your referral program is working, here are 5-must check metrics to look at.
1. Viral Coefficient
What’s the whole point of any referral program? It’s to get new customers from existing ones and how does that work? When referrals convert to sales.
This is what a viral coefficient means. To check how many referrals are converting to customers.
Let’s learn step by step how you can measure your referral program success by using the viral coefficient.
For this, you must know three things:
Number of customers with a referral link (Referrers)
The average number of referrals each of these customers makes (Average Referrals)
The average referral conversion rate i.e referrals that convert into customers (Average Referral Conversions)
Viral coefficient = (Referrers x Average Referrals x Average Referral Conversions) / 100
Next comes the time to brush up on some math skills.
Say I own a Shopify eCommerce store called Aroma Corner where I sell high-quality, scented candles. In my store, I have 150 current customers. Next, I’d like to consider that each customer on average refers 3 friends out of which 1 referred friend makes a purchase.
This means that 1 out of 3 become my customer, making my referral conversion rate 33%.
So my viral coefficient becomes (150 x 3 x 0.33) / 100 = 1.5
If a product or service has a viral coefficient greater than 1, it’s considered viral because every customer acquired through a referral will bring 1 to 2 customers.
Clearly, the higher the viral coefficient, the lower your customer acquisition cost (CAC) is.
2. Referral Conversion Rate
The hard work that goes into setting up a referral program is real, right? Activating a referral link for each existing customer and then showing it to them.
But what next? When those referral links are shared, do they lead to sales? Are those referrals converting to customers?
In order to check this, all you’ve to know is how many referral purchases happened out of the total number of referrals shared.
Knowing this will help you calculate the referral conversion rate.
Referral conversion rate = (Referral purchases / Referral shares) x 100
So for instance, if 50 of my customers refer a friend and out of this I get 5 orders, then
Referral conversion rate = (5 / 50) x 100 = 10%.
And that’s a bingo! As per industry standards, a referral conversion rate that is between 4% to 15% is considered solid.
3. Referral Rate
Often confused as referral conversion rate, referral rate is the purchase you got through referrals out of your total purchases. Quite simple, right? For example, if I made 300 sales in a month out of which 5 came through referral, then my referral rate it Referral rate = (Referral purchases / Total purchases) x 100 = (5 / 300) x 100 = 1.6%
Since 2.3% is the global average referral rate, it’s advised that yours is close to this.
4. Referral Participation Rate
Referral rewards are usually enticing. With one click and the hope of winning referral rewards, customers do not mind sharing their referring link with friends.
But what happens then? Are those referred customers actually clicking on the link and visiting your website? What’s the success ratio?
To find out, you need to know referral traffic and referrals made.
Referral participation rate = (Referral Traffic / Total Referrals Made) x 100
Now if I see that 20 referrals were made in a month and I got 4 referees to my website, then referral participation rate = (6 / 20) x 100 = 30%.
This means that only 30% of people who are being invited are actually clicking on the referral links and coming to my website incurring the fact that the referral content or rewards could be improved.
5. Referral ROI
In the end, it all boils down to two things: How much revenue am I making from referrals and what’s the return I get on referral program investment?
Let's calculate this step by step using referral cost.
Referral revenue: This can be calculated by knowing your Average Selling Price (ASP), the total number of referrals, and the referral conversion rate. Say I sell 5 shirts for $200 and 10 shirts for $500 in a month. Then my ASP is $6000. Next, I expect 50 referrals out of which 2 referred friends make a purchase. So my referral conversion rate is 4% (as per the aforementioned formula). Referral revenue = ASP x Referral conversion rate = $9500 x 4 = $24,000
Referral cost: Your referral cost is nothing but your CAC and that depends on the cost you put in incentives plus a marketer and referral software.
So if you give two-way rewards of $10 each for 10 referrals (10% conversion rate), pay a monthly $59 to a referral app and $300 to the campaign manager, then
Referral cost = $200 + $59 + $300= $559 x 12 = $6708 yearly
3. Referral ROI: Now if you divide your referral revenue by referral cost, you will have your referral program ROI. Referral ROI = Referral revenue / Referral costs = $24,000 / $6708 = 357% ROI
Referral Program Benchmarks on a Silver Platter
Setting benchmarks to measure your referral program success is essential but a hassle at the same time. Keep a track of referrals, shares, clicks, and orders and then calculating these metrics can be a task.
But what if I told you that you can have all the crucial metrics in one place and analyze your referral program performance?
Yup! It’s possible using referral program software. Itches your curiosity? Visit Flyy to learn more.
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