Estimating a referral program budget
So, ready to figure out your budget? Roll up your sleeves! 💪
Defining the objectives of a referral campaign
There are several general objectives for a referral program:
- Attracting new, real and active users to your booking app;
- Promoting your booking app among a specific group of people;
- Raising the loyalty level of your customers;
- Building up a database of active clients;
- Raising your “repeat purchase” rate;
- Re-engaging your passive customers.
In order to succeed, define and prioritize your goals for each referral program as detailed as possible.
Try basic SMART-analysis. Remember: characteristics of the target group of your marketing campaign matter most. It’s essential to know:
- Who are the people you want to reach with your program?
- What is the motivation for people to refer your service to their friends?
- What will be the best way and time to ask for a referral?
- What are you giving people for their recommendations?
- How much are you willing to spend on it?
- While setting up a referral campaign to market your taxi business, you need to keep in mind the only costs you will make are the costs of the actually redeemed coupons.
This means, on one hand, that you do not pay for the only fact you have a referral program. On the other hand, it’s still essential to estimate the optimal budget for it.
Join our next lesson on the budget estimation!
Figuring out the numbers
The numbers we’re going to calculate now are essential to do the hardcore math of your budget estimation.
Customer Lifetime Value (LTV) shows how beneficial a customer is for you. This value is expressed in the monetary unit of your country. To compute it, you have to multiply the next three numbers:
- Average revenue per transaction (in the monetary unit of your country);
- Number of transactions per customer per year;
- Customer lifetime (in years).
For example, an average customer spends $10 per transaction. An average customer uses your services 100 times a year. An average customer remains your active client for 2 years.
$10 x 100 x 2=$2,000— will be the LTV in this case.
Total number of the customers is a valuable you can figure out in different ways. Some businesses have a database of all the clients. Some companies summarize the numbers of their followers on all the social media they use. The number of customers your service desk speaks to, your website traffic — all those figures can be included to deduce the Total number of customers.
The total number of the customers allows you to calculate the Number of your advocates. 15 to 35% of existing clients participate gladly in a referral program — this is the Advocate conversion rate.
Number of your advocates = Total number of the customers x Advocate conversion rate
For example, you’ve got 100 customers, and you expect 30% of them to be a part of your referral.
100 x 30% = 30 advocates for this very referral program.
Advocate conversion rate, total number of clients — these variables are very dependent on how successful the promotion channels for the referral program will be.
Referral program value is the variable showing how big the influence of the referral campaign is on your business. There is an equation to calculate it:
LTV x (Number of advocates x Referrals per advocate per period x Conversion rate)
Let’s say your LTV is $2,000, you will attract 30 advocates for the referral program, and each of them will refer you 5 times during the time of the campaign. Let’s say conversion rate will be 20%.
$2,000 x (30 x 5 x 20%)=$60,000—this amount of money your company gets with this very referral program.
Costs of the referral program include all the costs launching a new referral will possibly bring. To calculate the total costs, you need to summarize following numbers:
Rewards for advocates cost + Rewards for new clients cost + Administration costs
Say, the advocate coupon costs you $5 and you will attract 20 advocates. This gives us $100 on Rewards for advocates cost.
Say, a coupon redeemed by a new client costs you $10, and you will attract 100 clients. This means $1,000 Rewards for new clients cost.
The costs of setting up a referral campaign within OnDe are $0. Accordingly, the administration costs will amount to your own management costs. Let’s say you spend $400 on your own administration.
$100+$1,000+$400=$1,500—total costs of the referral.
Now we can evaluate the RoI and see if it’s realistic! What’s even better, we’re all set to calculate the reasonable costs per advocate that will refer you, and what a new client may cost (price per new customer)!
Let’s have a look at this equation:
RoI of a referral= Referral program value / Costs
As you see, your RoI (as you remember, it’s 3 in an average case) consists of the value of your referral campaign for the business divided by the total costs you make with the launch.
Based on the numbers we’ve already mentioned, we can deduce this:
- RoI = $60,000 / $1,500
- RoI = 40
This means, you will return 4,000% of the investments!
Of course, the numbers we’ve used are not real and you will have to work with your own figures. To maximize your RoI, you may play with the costs: try different figures for advocates rewards costs, new clients rewards costs. You can invert the equation we’ve just analyzed to deduce the ideal coupon values according to the RoI you want to reach.
OnDe system spares you additional administration costs, and lets you to keep track on how much every new client costs. We hope this lesson helps you setting up an efficient referral without an MBA-education 😇
If you feel ready to try one, in the next lesson we’ll get your first set up done:)