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Referral program

A referral programme is a scheme in which a store rewards existing customers for bringing in new ones, usually also giving the new customer a discount.

How it works

An existing customer gets a personal link or code to share. A friend who uses it gets a discount on their first order. Once that order is placed, the referrer gets a reward, such as store credit. The store pays rewards only for orders that happen, so it can set the programme’s cost per new customer against customer acquisition cost from ads.

Both the reward and the discount come out of margin, so their size is measured against margin, not revenue. There is no single benchmark for the reward: it depends on margin, order value and how often customers come back. Our guide to loyalty and referral programmes shows how large a reward a margin can carry.

Formula

(Rewards to referrers + discounts to friends + programme costs) ÷ new customers from referrals

Example

Example store, not client data.

The tableware shop gives a referrer 100 in store credit and a friend 10% off a first order, which is 60 on its average order of 600. Its referral app costs 3,000 a month. In one month, 40 friends place first orders: (40 × 100 + 40 × 60 + 3,000) ÷ 40 = 9,400 ÷ 40 = 235 per new customer. From ads alone, its acquisition cost is 40,000 ÷ 180 = 222.

Not to be confused with

  • Loyalty programme — rewards customers for buying again. A referral programme rewards bringing in someone new.

Right and wrong readings

  • Wrong: “Each referral costs us the 100 reward.” Right: the friend’s 60 discount and the app fee count too: 235 per new customer in the example, more than the 222 from ads.
  • Wrong: “All 40 friends are customers the programme won.” Right: the code shows who used it, not who would have bought anyway.

Benchmarks

Benchmark according to Schmitt, Skiera and Van den Bulte (Referral Programs and Customer Value, Journal of Marketing, 2011; about 10,000 customers of a German bank, tracked for almost three years): referred customers had a higher retention rate. On average, they were worth at least 16% more than non-referred customers with similar demographics and time of acquisition. The gap varied across customer segments, and a bank is not an online store. Your niche may differ.

Sources