Grow with a Tiered Refer a Friend Program, Like Dropbox and Paypal

Why did Paypal spend $60 million on Incentives for a Refer a Friend Program, in the early days of the business?

The reason comes form this one important metric:

What is your Cost Per Acquisition (or CPA). I.e. How much does it cost you to make a conversion, whether this conversion is a sale or a subscription (a lead).

For example if you’re a publisher, and your successful conversion is an opt in to your newsletter, you would need to look at how much it costs you to get one conversion. The costs would either be:

• Direct, i.e form advertising.

• In-direct, e.g. the running costs of hiring writers.

On the other hand, if you’re in ecommerce, your desired conversion is ultimately a sale made.

Generally speaking, and regardless of whether you have a Refer a Friend program or not; you want to be aware of you CPA, so that you can make informed decisions about the best way to grow your business.

A typical CPA could be something as low as $5 or as high as $1000. The CPA in itself is not enough to give you the full picture unless you combine it to the Life Time Value (LTV) of your customer or subscriber.

Combining these two metrics: the CPA an LTV gives you a good idea of Return on Investment ROI. One of the most fundamental things I learned whilst working as a Conversion rate Optimization consultant is that ROI is one of the most important reference metric businesses must keep in check, in order to keep healthy.

Now back to Refer-a-Friend programs!

If you think a $5 CPA is great; imagine if you get a CPA of $0.25?!

I can tell you that there is a case study we’ll have a look at below where the CPA from Referrals is $0.25!

So to answer the question as to why Paypal invested all that money in Refer-a-Friend incentives… it is likely because referrals provided them with a great CPA; and hence an attractive ROI when compared with other channels; whether it is advertising or something else.

When you invest the effort in building a great referral program; the ROI pays off handsomely!

In this article, I will show you whether a Refer a Friend program is suitable for your business in the first place, how to execute the type of Refer a Friend program most suited for your business model and how to combine referral programs with advertising for maximal results.

I will also demo for you a the Gather tool and how you can set up a referral program using Gather.

Types of Refer a Friend Programs

There are two types of Refer a Friend programs:

• A lead or subscriber based referral program

• Sale based referral program

Simply, the difference between them is:

• When a desired conversion is an opt-in as a lead; this is defined as a lead based referral program. The ROI here is measured in terms of Cost Per Lead as well as LTV.

• When the desired conversion is a sale; this is defined as a sale based referral program. The ROI here is defined in terms of Cost Per Sale as well as LTV.

When to Use a Lead Based Referral Program

There are a number of cases where a lead based referral program is worth considering:

• When your main product is a Newsletter (i.e. you’re a publisher),

• when your customer gets value out of your email marketing without making any additional purchases,

• if you have a high customer Lifetime Time Value with long sales cycles, e.g. enterprise sales,

• or if you are launching a new product that isn’t available yet.

The reason for the first two cases above, is because when your Advocate refers a friend; they will be referring them to your email content; not your product.

For example, if you are an ecommerce store; and you do not have a vibrant frequent newsletter, a referred lead will not have the opportunity to convert to a customer, since they do not receive consistent communication from you.

Also, if they receive consistent communication from you which isn’t necessarily valuable to them, the chances that they will convert to a customer will be comparatively low.

As for the third case… with long sales cycles and high ticketed items; you would not expect your current customer to make successful sale on you behalf. You very much have to be part of the sales process. Hence it is wise to ask your customer for a lead referral and reward them accordingly.

And the fourth case where you are a launching a new product, obviously this would suit a lead based referral program better. An example of this was Harry’s launch program. The illustration below demonstrates how a lead based referral program can be used for a product launch.

When to Use a Sale Based Referral Program

You would consider using a sale based referral program if:

• You CPA is on the high side, when comparing to the LTV of your customer;

• you don’t have an automated consistent nurturing system for prospects (e.g. an email drip campaign);

• you don’t have frequent email marketing newsletters (i.e. consistent valuable content worth sharing);

• or you prefer predictability. You would rather your customer makes the sale for you rather then you also co-investing with your customer to make that referral sale.

When is a Refer-a-friend Program a Good Idea?

When I recommend a referral program to my clients or customers; I usually look for the following signs:

• An email open rate of 25% or more.

• A repeat purchase rate of 30% or more.

• A moderate or high CPA to LTV ratio.

• Signs of readers or customers joining you from word of mouth.

• A business model which is based on a subscription. For example, software as a service, subscription cosmetics or paid newsletters.

• A good Net Promoter Score.

When is a Refer a Friend Program NOT a Good Idea?

We can’t shy away from covering reasons why a Refer a Friend program will not be worth the investment. This includes:

• Your CPA to LTV is comparatively low anyway. For example, if it costs you a dollar or less than a dollar in ads to acquire a new customer and your customer LTV is $1000 (an extreme case I know); then you absolutely do not need a referral program to keep your company profitable!

• Most of your customers are first time customers.

• None of your customers or readers come referred.

• Your Net Promoter Score is low; your product or service needs improving first. Most products or services will not start great; it will require a number of iterations until the product/service reaches a point where customers are already recommending it. Check out this Product-Market-Fit framework from Superhuman, which gives you a way to gauge how close you are to a good product.

Single Tier vs Multi Tiered Referral Programs

A single tiered referral program is one most used in an ecommerce setting. For example, a program similar to Uber’s referral program, where every time a customer refers a friend as a customer; they receive a coupon.

A tiered referral program, on the other hand, is what we typically see with publications like theSkimm, Morning Brew and Lunar from SCMP.com.

They are also found with various product launches (before a product is available). An example of this is Harry’s launch program.

A tiered referral program is a great idea when your subscriber has a connection to your brand. This is why referral programs work well when there is a community, or even a political, element to the product.

In a tiered referral program, Advocates refer a number of friends to complete one tier, before they qualify to the next tier where they would unlock access to more valuable rewards. For example:

• Refer 5 friends and receive a sticker

• Refer 10 friends and gain access to a private Facebook group

• Refer 20 friends and receive a special t-shirt

Why Invest in a well Executed Referral Program?

According to Tyler Denk from Morning Brew, the Cost Per Acquisition from the referral program is $0.25 which is crazy low. This is also where their tiered referral program accounts or 30% of their subscriber list.

The unmatched benefit illustrated in Morning Brew’s example is essentially why a referral program is well worth the investment.

According to Experian, Every dollar spent on email marketing offers a return of $44!

In addition to that, research conducted by Nielson found the most trusted form of advertising is recommendations from friends customers know.

The Referral Marketing Bonus - Get Way More ROI out of Advertising with Referrals

At Gather, we constantly see the invitation-to-successful-referral conversion rate at approximately 30%.

Morning Brew reported that out of the 1.5 million subscribers; 30% are referred subscribers.

Whilst referral marketing is by no means the same as viral growth, referral marketing is there to get you more ROI out of advertising. If your ads bring you, say, 100 subscribers a month; with referrals you would amplify that effect; e.g. those 100 subscribers can go on to refer you 30 extra subscribers, giving you 130 subscribers instead of 100 subscribers from you advertising efforts.

This, in turn, reduces your CPA from advertising!

You get way more out of advertising, using a Refer a Friend program.

The performance of  a referral campaign all depends on:

• How attractive the the rewards are.

• How well you communicate the referral program to your customer base, or readership, and how well you recruit them

• How well you follow up, and continuously encourage your advocates to keep recruiting.

This is why it's important to get the execution of a referral program right. The funnel of a well executed referral program would look like the following:

• Customer base to Advocate: 10% Conversion rate

• Percentage of new customers to Advocates: 30% to 50%

As you can see, the bottleneck of a Refer a Friend program funnel is in converting your existing customer base or readership base to active Advocates.

Using a referral management tool like Gather saves you a tonne of time and effort in automating many of the tasks above (like advocate follow up) so that you execute an affective referral program without much effort.

An Example of Growth Through Both Referrals and Advertising

Let’s say you serve a customer database of 200k (built over years of hard work).

This could yield you 20k Advocates, yielding 10k new customers.

From then, every month…

10k new customers yields 1k Advocates, which yields 500 new customers.

And In addition to that:

20k new customers is acquired from advertising yielding 2k Advocates, yielding 1k new customers.

Which gives you a total of 1500 new customer from referrals for that month

As you can see in the example above, referrals does a great job in giving you more ROI out of advertising. As advertising gets more expensive, the role of referral becomes more important.

How to Setup a Referral Program with Gather - A Sneak Peak Video

From a webinar I ran some time a go, here’s a video showing you how you would typically build a automated Refer a Friend program with the Gather tool.

The rest of the webinar is on the extended video below, where I cover most of the things I referred to in this article. Enjoy!