Use Math + Motivation to Get Biggest Profit
TL; DR
Last week we talked about how much to pay for your referrals, this week we talk about how to reward your referrals to convert the most business.
Last week was all about the math, this week is about considering incentives/motivation.
You need to consider the math and motivations to calculate profit.
Profit is the big north star for determining the success of any marketing program, including referral programs. To determine the profit of referrals you’ll consider CAC (customer acquisition cost) against revenue earned:
for the transaction,
for the year and
over the customer’s life-time.
Converting the most business from referrals is a factor of three things:
i) reminding customers about your referral program;
ii) making it easy for your customers to ask for referrals;
iii) rewarding your customer and referral with enough of an incentive that your customer will send you referrals and the referral will book a job.
Ask customers for a referral after they’ve interacted with you, e.g. booked a job, checked your site, paid for a service.
Give customers their own link they can share via text, em or social to ask for referrals.
Give to get, reward your customer and the referral; the reward should be enough of an incentive and take into account the fee for your regular service.
TIP → we’ve included a spreadsheet link so you can calculate your reward credits and costs.
Math + Motivation = Profit of Your Referral Program’s Success
Last week we talked about how much to pay for your referrals, or the math to figuring out how much to pay referrals based on CPL (cost per lead) and CAC (customer acquisition cost). The reality is your CPL for referrals is a non-starter because you only pay if a referral converts to a customer. But it’s a good exercise to work through the costs and compare differences between other lead sources (e.g. Google ads, lists, etc.).
In this week’s post we discuss what motivates both your customer and the referral so you can convert the most referrals to paying customers. You can optimize the success of your referral program and earn the most new business by thinking about the math (CAC) and the motivations.
Profit is your north star, compare CAC against revenue earned per transaction, annually or the customer’s lifetime value.
As a refresher:
you want the lowest CPL and CAC
referrals really only cost you if they convert
a lead source is how the lead’s information gets to you, e.g. a list, search, ads, WOM, etc.
a lead is defined by criteria you set, the easiest way to define a lead might be if they’ve filled out a web form or booked a job with you.
Calculations for CPL and CAC are shown below so you have them handy.
Cost spent to obtain the leads
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Number of leads by lead source
CAC calculation
Cost spent to obtain the leads
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Number of leads converted to customers
What we want to consider
Profit is the big north star for determining the success of any marketing program, including referral programs. To determine profit for referrals you’ll consider CAC (customer acquisition cost) against revenue earned for the transaction, for the year and over the customer’s life-time, LTV (life-time value).
In the example above, we’ve set the CAC, typical job price, revenue earned per customer over the year as well as customer lifetime. Then we calculated profit. You can see you start earning a profit after the 3rd job is booked. So you need to make sure that on average customers will book 3 jobs to recoup your investment. After the 3rd job all revenue is profit (without considering your fixed costs).
You can use this spreadsheet to change the revenue earnings.
*The CAC is automatically calculated for you based on other information you provide.
Convert the most referrals into high-paying customers with reminders, ease-of-use and rewards.
You run your business so you can earn a profit. That means you need to cover all of your fixed costs as well as variable costs. And your costs include attracting and keeping customers. So you want to make sure you’re not just making profits when you add customers but you're also optimizing for profits.
We’ve already discussed in previous posts why referrals are the most cost-effective way of building your business.
What’s also important is converting the most referrals, so here are some tips to do so.
Remind customers about your referral program
Make it easy for your customers to ask for referrals
Provide enough incentive that your customer will ask, and the referral will convert to a paying customer
Remind customers about your referral program
Ask customers more than once and remind them when your business is more top of mind, e.g
When they’ve booked a job with you
Once you complete the job, a “thanks for your business, share with a friend” type of message
After they’ve paid an invoice, a “Refer a friend, get credit” type of message
You want to ask them throughout their relationship with you, and you can ask through text or email.
Make it easy for your customers to ask for referrals
The less friction you create in asking for a referral the more referrals you will get. And the more referrals received the more volume of new paying customers you’ll have.
Give customers their own link they can easily pass on, and don’t make them login anywhere to share the link or get the link.
Offer them a link that can be shared via text, social or email.
Let customers know you’ll be tracking all referrals so once a referral books and pays for a job they’ll earn a reward.
Provide enough incentive that your customer will ask, and the referral will convert to a paying customer
Remember that for the most part the cost of referrals has a low risk. You only pay when the referral converts into a customer, you’re not directly paying for leads.
You’ll want to think about your profits, your individual booking fee, and what would be attractive to a customer as well as the referral.
Provide the reward in credits to your service to decrease administrative overhead and cash spend. Credits also attract the most loyal customers. Eg you want to motivate a customer who wants to buy from you again vs get a certain prize.
The amount should be significant enough to both your customer and referral. The significance is a measure of the discounted price as well as value received.
You can test out different amounts to gauge performance over time and also make the amounts different for the customer and the referral.
Now let’s take a few different examples to help you calculate profits by changing the referral reward.
In this example you have 3 different customer types with different:
standard job fees
annual revenue
LTV
The amount of referral credit you’re giving each customer and referral has stayed the same. And you can see that the *CAC has also stayed the same, what’s changed is your time to profit. What you want to consider is:
How much time do you want to wait for time to profit
How attractive is that amount to the customer and referral
What is the compromise between these amounts if different
Eg if you’re providing almost 50% discount to each the customer and the referral, that would be attractive to an engaged customer or even one that is considering re-booking. 5% credit probably wouldn’t be attractive if it’s for a smaller job (say $50) but if it’s a $1,000 job getting $50 off could be attractive for the existing customer and you may want to double or triple that amount (eg $100 or $150) for the referral.
*We’ve excluded tech tools and any other costs associated with converting a referral so you can consider the reward only in your CAC. Note that the reward amount can also drive more referrals.