How To Budget For A Customer Referral Program
Now that you know what your customer referral program needs are and the kind of technology your company is ready to commit to—it’s time to start thinking about your budget.
Knowing how to calculate the value of your referral program will help you:
- Justify your purchase to your executive team
- Measure the ROI of your program
- Determine if you need more (or less) resources
When evaluating referral solutions, there are three cost elements to consider:
1. Cost of software
Referral software solutions can cost hundreds or thousands of dollars a month depending on the size of your organization, so don’t rush the buying process. Take time to carefully evaluate all the features and make a precise plan on how you’ll use the software within your department (the higher ups will appreciate this). A pro tip, read product reviews on several websites—like Getapp—to see how happy (or unhappy) other users are.
2. Cost of rewards
As a general benchmark, offer customers a reward valued at 10% of your average deal size. Multiply this amount by the number of referrals you hope to receive, and their average conversion rate. (A 2014 B2B sales benchmark study by Implisit found customer referrals convert at an average rate of 3.63%.)
3. Cost of administration
If you’re investing in software, you’ll see immediate gains in efficiency (compared to spreadsheets and tracking sales people down). As a rule of thumb, on-going administration of your program should take 30% (or less) of a full-time employee’s time.
Your program ROI should also take into account your average sale price (ASP) and current cost per lead (CPL). One well placed referral could cover the entire cost of your program, depending on your average selling price. Plus, increasing the referrals you receive should also reduce your average cost per lead.
In our free eBook, we break down everything your company needs to consider before buying referral software, including the features you should be looking for and strategies that will help you consistently generate quality referrals.
Calculating the ROI of your customer referral program
The formula for calculating your referral program return on investment is:
New revenue (Referrals @ ASP x Average conversion rate)
— Investment (Software + employee + rewards — CPL reduction)
= Referral program ROI
Here’s an example: AcmeCo has invested $24k in software over 12 months, and they plan to use 10% of a $70k employee to run the program. Their ASP is $50,000 per year. They have 500 customers and expect 10% to provide one referral a year (50 referrals). They predict their referrals convert at a rate of 3.5% and will result in a CPL reduction of $25,000. For each referral submitted, they will reward the referrer $500, and another $5,000 if the deal closes.
$87,500 in new revenue
(50 referrals @ $50K ASP x 3.5%)
— $48,500 investment
($24K software + $7K employee cost + $42.5K rewards* – $25K reduction in CPL)
$39,000 ÷ $48,500 investment = 80.4% ROI
*Cost of Reward Calculated as 1% of ASP per lead generated and 10% of ASP per referral converted