7 Metrics You Need to Track to Make Your Referral Program Successful
Ensure the success of your referral program and drive growth by keeping an eye on these 7 crucial metrics.
If you've come as far as wanting to know the right metrics that can establish the success or failure of your referral program, we're sure that you already know the importance of a referral program and why you need one.
So, we'll get straight to the point
Here are the top 7 metrics that are definitive in your referral program's success:
- Conversion rate: The number of referred customers who complete a desired action (say, they place an order).
- Referral source: Identify which sources are generating the maximum referrals.
- Customer lifetime value (C-LTV): Measure the value that each customer adds to your business+ projections of how long they will stick with you.
- Cost per acquisition (CPA): Calculate how much you are burning to get every new customer onboard through your referral program.
- Referral rate: Keep a track of the rate at which your customers are participating in your referral campaign.
- Net promoter score (NPS): Are customers satisfied with your product/ experience? Will they prospective brand advocates?
- Redemption rate: Calculate the number of rewards redeemed through the referral program to know if the campaign was effective.
Don't worry! We won't leave you with just that. Let's deep dive into these 7 metrics individually.
#1 Conversion rate of a referral program
Conversion rate is a metric that measures the effectiveness of a referral program in driving desired actions from referred customers. It's crucial to track conversion rate for a referral program because it provides insights to learn if it is performing in accordance to its objective. A low conversion rate could indicate a need to review and improve various elements of the referral program, such as the referral offer, the referral process, or the customer experience.
Measuring Conversion Rate
To accurately measure conversion rate, it's essential to have a system in place for tracking the number of referred customers and the actions they take. Here are the steps to calculate conversion rate:
- Determine the desired action: The desired action is dependant on what you are striving for through the referral program. It could be making a purchase, signing up for a service, downloading an app, or any other action that the business wants referred customers to take.
- Track referred customers: To measure the conversion rate, it's necessary to track the number + the journey of referred customers who visit your business's platform and/or take any other desired action. This can be done by assigning unique tracking links to each referral source, or by using a referral tracking software.
- Calculate conversion rate: Divide the number of referred customers who complete the desired action by the total number of referred customers. For example, if 100 referred customers visit the website and 10 of them make a purchase, the conversion rate would be 10%.
- Analyse conversion rate over time: It's important to regularly track conversion rate over time to identify customer trends and understand how it's impacted by various elements of the referral program, such as changes in the referral offer or customer experience. This helps greatly in tailoring the referral program further to make it super effective.
#2 Identifying and Tracking the Referral Source
Referral source tracking refers to the process of identifying where referred customers are coming from, such as a friend's referral, social media, or email. By tracking the referral source, businesses can figure out best channels for driving referrals and allocate resources to optimise the program further.
Techniques for Tracking Referral Source
- Unique tracking links: Assigning unique tracking links to each referral source is a simple and effective way to track referral source. When a referred customer clicks on a unique tracking link, the referral source can be identified, and the conversion rate can be tracked.
- Referral tracking software: Softwares that can be integrated with a business's website, email, and other marketing channels to track referral source in real-time. Few of the best referral tracking softwares include: ReferralCandy, Growsurf, Referral Hero.
- Promo codes: When a referred customer uses a unique promo code assigned to them, the referral source can be identified and the conversion rate can be tracked.
#3 Customer's Life-Time Value
Customer Lifetime Value (CLV) is a metric that represents the estimated value a customer will add to a business over the entire course of their relationship. CLV takes into account the customer's purchase history, purchase frequency and customer life-span.
Importance of Measuring CLV for a Referral Program
By understanding the CLV of referred customers, businesses can estimate the long-term value of a successful referral program and further plan the program's design accordingly. Additionally, CLV can help businesses understand the impact of their referral program on their overall business goals.
Methods for Calculating CLV
- Simple CLV: A simple CLV calculation is done by multiplying the average purchase value by the average purchase frequency of the referred customers.
- Historical CLV: Historical CLV is calculated by analysing a customer's purchase history, including the total amount spent, purchase frequency, and customer lifetime.
- Predictive CLV: Predictive CLV is calculated by using predictive analytics and machine learning algorithms to predict a customer's future behavior and spending.
#4 Cost Per Acquisition
Cost per Acquisition (CPA) is a metric that measures the cost of acquiring a new customer through marketing or advertising efforts. In a referral program, CPA is the cost of acquiring a new customer through referrals, and it gives important inferences to ensure that the program is supporting a cost-effective means of customer expansion.
How to Calculate CPA in a Referral Program
To calculate CPA in a referral program, the following steps can be taken:
- Determine the total cost of the referral program: This includes any marketing or advertising costs associated with the referral program, such as referral rewards or incentives.
- Track the number of new customers acquired: This can be done by tracking the number of referred customers who complete the desired action you have defined, example: making a purchase.
- Divide the total cost of the referral program by the number of new customers acquired: This will give the cost per acquisition in the referral program.
For example, if the total cost of the referral program is $1,000 and the number of new customers acquired is 100, the CPA would be $10 ($1,000 / 100).
By tracking CPA, businesses can determine the effectiveness of their referral program and make changes to optimise their program and reduce costs. Additionally, CPA can help businesses determine the return on investment (ROI) of their referral program and make informed decisions about the allocation of resources.
#5 Referral Rate
Referral rate is the percentage of customers who refer others to a business through its referral program. It is calculated by dividing the number of successful referrals by the total number of customers participating in the referral program.
Why it is Important
Referral rate is an important metric for a referral program because it helps businesses understand the effectiveness of their referral program and the level at which it is engaging the existing customers. A high referral rate indicates that customers are satisfied with the business and its products or services, and are willing to refer others. Not only that, referral rate also helps teams understand if the design of their campaign is working well with the customers or not. In other words, if lesser customers are participating in a referral program it could either mean that they do not find it directly beneficial to them, or, they simply are committed to the product/service. A low referral rate may indicate that the referral program is not effectively incentivising or motivating customers to refer others.
How to Calculate Referral Rate
To calculate referral rate, the following steps can be taken:
- Track the number of successful referrals: This can be done by tracking the number of referred customers who meet all the desired conditions/ actions.
- Divide the number of successful referrals by the total number of customers participating in the referral program: This will give the referral rate as a percentage.
For example, if 100 customers participate in the referral program and 10 of them successfully refer others, the referral rate would be 10% (10 / 100).
#6 Net Promoter Score (NPS)
Net Promoter Score (NPS) is a customer satisfaction metric that measures how likely customers are to recommend a business or its products or services to others. It is calculated by asking customers to rate their level of satisfaction on a scale from 0 to 10, with 10 being the highest.
Customers who rate their satisfaction as 9 or 10 are considered "promoters", 7 or 8 are "passives", and 0 to 6 are "detractors".
NPS is calculated by reducing the percentage of detractors from the percentage of promoters.
Importance of NPS in a Referral Program
A high NPS score indicates that customers are highly satisfied and are likely to refer others, while a low NPS score indicates that there may be issues with customer satisfaction that need to be addressed. By tracking NPS, businesses can identify areas for improvement and tailor the design of the referral program- to increase customer satisfaction and therefore, total referrals.
How to Measure NPS in a Referral Program
To measure NPS in a referral program, businesses can ask customers to rate their level of satisfaction with the referral program and the business overall after they have made a referral. The NPS score can then be calculated by subtracting the percentage of detractors from the percentage of promoters. This will give a clear picture of how satisfied customers are with the referral program and the business overall, allowing for data-driven decision making to improve the referral program.
#7 Redemption Rate
Redemption rate refers to the percentage of referral coupons or codes that are actually used by referred customers. It measures the effectiveness of a referral program in encouraging referred customers to take a designated action.
Importance of Measuring Redemption Rate
Measuring redemption rate is important for a referral program because it provides insight into how well the referral incentives are motivating referred customers to take action. If the redemption rate is low, it may indicate that the referral incentives are not appealing enough or that the process for redeeming the incentives is too complicated.
How to Calculate Redemption Rate
To calculate the redemption rate, simply divide the number of referred customers who redeem the referral coupon or code by the total number of referred customers.
For example, if 100 referred customers are sent a referral coupon and 30 of them use the coupon to make a purchase, the redemption rate would be 30%. This provides a clear picture of how well the referral incentives are performing and can be used to make data-driven decisions to further improve the referral program.
And those were the key 7! Tracking these metrics will allow you to make informed decisions while running a referral program and ensure that it is well aligned to your overall business goals.