1. Define your Value Proposition

The first thing to do when building an ecommerce referral program is to define your value proposition. What value do your products offer existing and new customers? You can also define some of the attributes that make your offering unique.

Here are some examples of value propositions:

• Unique materials and designs

• Save time and money when using the product

• Style & aesthetics

• New technology

Here are some examples of attributes that make your offering unique:

• Shipping and delivery

• Customer reviews you can share

• Used by influencers

• Try before you buy

• Guarantees

Your value proposition will form the basis of your communications to existing and prospect customers.

2. Define your Customer Cost per Acquisition (CPA) & Lifetime Value (LTV)

Next, calculate the CPA and LTV of your customers. How much does it cost to obtain a customer? How often will they come back for repeat purchases and what is the total value generated by each customer?

For example, if your value proposition is ‘waterproof clothes’, how many times does your average customer come back to make a purchase per year (e.g. they bought a waterproof jacket, 6 months later they buy a waterproof pair of trousers, and 6 months later they buy a waterproof cap).

Let’s say the answer is 3 times for the first year after acquiring a customer, 2 times for the second year and once for the year after that. After the 3rd year your average customer drops off. Let’s also say that your average order value is $100. This would give you an LTV of $600.

When it comes to the CPA, consider how much you spend on advertising / influencers / content. Let’s say you run Facebook ads, Facebook should give you an indication of what that looks like.

This guide from Wordstream provides some benchmarks on CPA’s from Facebook ads. Let’s say your CPA is $10.

We will visit the CPA below when we tie all of the steps together.

3. Define your Growth KPI's and Target Referral Coefficient

The next step is to set growth targets for your campaign. What would you like to achieve with your campaign?  What percentage of revenue growth are you trying to achieve through your referral program?

Your target referral coefficient is the number of new customers an existing customer successfully refers to you, on average.

Consider the following example, when calculating the target referral coefficient:

• Growth KPI: 50% growth in revenue in 12 months where 5% is sourced from a customer-to-customer referral channel.

• $100k referral target on $2 million in revenue per year, from the customer-to-customer channel.

• Where the average order value is $100, you would set a target for 1000 successful referrals over the course of 12 months.

• On 10,000 customers total the database, acquired over the 12 month period, each customer would refer 0.1 customers on average. i.e, referral coefficient of 0.1.

Side Note: This calculation is based on the assumption that you would calculate revenue from referred customers using the Average Order Value rather than the Life Time Value. A calculation that is based on Life Time Value would require a lower number of referrals to achieve this example’s $100k revenue target.

So what does this all mean? It means that to obtain the target revenue growth of 5%, we need each customer to successfully make 0.1 referrals.  In other words, every 10 customers you have would yield 1 new customer.

With a referral co-efficient defined, now we move on to consider the most appropriate reward structure for the campaign to achieve this target.

4. Design an Enabling Reward Structure

Design a reward structure that is on brand and enables Referral Continuity.

Referral Continuity here means that your customers are incentivised to refer contacts on an ongoing basis.

Use the value proposition (identified in step 1) to design rewards that give your customers "more of the same" of your value proposition.

For example;

• Product discounts

• Free additional products

• Amazon gift cards for complementary products

• Product accessories

• Exclusive content

• Exclusive experiences related to your value proposition

• Community and club memberships

This is also where we revisit the CPA and LTV you identified in step 2. Make sure that the cost of a reward provides a good ROI, taking the LTV of newly acquired customers into account.

Also, make sure the rewards offer a good ROI when compared to other means of acquiring subscribers, like advertising. 

For example:

• It may cost $10 to acquire a new customer from a Facebook ads campaign

• If a referral reward for a single customer costs you $2.50, this would provide an attractive ROI when compared to ad spend. Things to consider when calculating your CPA from the customer-to-customer channel include the cost of discounting (relative to the background discounting that you may offer) and the technology cost of running a referral program.

When considering the reward structure, factor in your target referral coefficient.

In the example above, the referral coefficient of 0.1 can typically result from: a segment of your customers referring you many of their contacts, a segment of your customers referring you a small number of their contacts, and a segment of your customers referring you none of their contacts.

Because of this spread in customer influence, a good strategy here could be to provide each customer an attainable target to get a reward. Many referral programs ask their customer to refer them just 1 customer for a reward.

In addition to that, it may also be worth giving your most influential customers (i.e. those who perhaps have a large reach online and may refer you their followers as well as their friends), a relatively ambitious target, e.g. referring 10 contacts for a higher value reward.

Deploying a referral program that facilitates tiers or milestones would allow you to do so.

5. Track & Improve

Finally, once your referral program is up and running, use your identified referral coefficient to track your progress.

Consider the following:

• Is the average referral coefficient from the referral program in line with the target?

• How can you change the reward structure to improve the referral coefficient?

• How can you improve the messaging to customers and advocates to improve the referral coefficient?

As with many marketing and advertising approaches, it is always a work in progress. Let us know if you have any additional strategies that we can include here, in the comments below.

*The contents of this document do not constitute advice and should not be taken as advice. The contents of this document are for information purposes only. Results may vary and are not guaranteed.