How to Calculate the ROI of Your Referral Program
Referral marketing is a powerful tool that can help businesses acquire new customers and increase their revenue, increase the average lifetime value of customers and more. According to a study by the American Marketing Association, referred customers have a 16% higher lifetime value than non-referred customers. Additionally, a Nielsen study found that 83% of consumers trust recommendations from people they know, while only 33% trust ads. This highlights the power of word-of-mouth marketing and the potential impact of a successful referral program.
However, before you build out your referral program you need to evaluate whether referral marketing is the right strategy for your business model. This is where the SaaSquatch Referral Program ROI Calculator comes in handy. To utilize this tool effectively, you’ll need to come prepared with a few crucial pieces of data:
- Number of monthly active users or customers you have
- The average lifetime value of your customers
- Total reward costs per referral
The remainder of this article will cover how to calculate the average lifetime value of your customers (CLV) and the total reward costs of your program.
Understanding Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) is a metric that estimates the total revenue a customer will generate for a business over time. It’s calculated by multiplying the average revenue per customer by the number of years or months they stay with the business. Understanding CLV is important when developing referral programs because it can help businesses determine appropriate rewards and evaluate ROI.
How to calculate your customer lifetime value CLV:
CLV = (Average Customer Lifetime * Monthly Plan Cost) + Average Up-sell
To calculate the CLV, you’ll need several data points:
- Distinct time period(s) — or total tenure for an individual account
- Total number of orders placed in that time period or tenure
- Number of unique accounts
- Total revenue within your chosen time period or individual’s tenure
- Average retention period of all or multiple accounts
With this information, you can calculate:
- Average Purchase Frequency: This is your total number of orders placed by all or multiple accounts, divided by the number of unique accounts.
- Average Sale Value: This is your company’s total revenue from all or multiple accounts (or an individual account), divided by the number of orders placed by them.
- Customer Value: This is your average sale value multiplied by your average purchase frequency. For an individual customer, it’s the average sale value multiplied by total orders, multiplied by tenure.
- Average Lifespan: This is the average amount of time (in years or months) customers stay with your company.
- Customer Lifetime Value (CLV): This is your customer value multiplied by the average lifespan (or actual lifespan, individually).
For example, assuming:
- A 24-month average lifetime,
- $50 average upsell,
- And an average monthly plan of $25.
The CLV would be: (24 * $25) + $50 = $650
It’s important to note that CLV calculations can be more complex depending on the business model and available data. This basic formula provides a starting point, but additional factors such as customer acquisition costs, retention rates, and discount rates may need to be considered for a more accurate CLV calculation.
Calculating the Total Reward Costs per Referral
Another piece of data you’ll need in-hand in order to use the calculator is the total associated costs of the rewards you’ll be giving out to your program’s participants per referral. A double-sided referral program rewards both the referrer and the referred customer, whereas a single-sided program only rewards one of the participants. Depending on what you choose to offer, you need to calculate the dollar value of these rewards.
For instance, if:
- Your reward is 20% off to both the referrer and referred customer for 12 months,
- Both participants are on a $25/month plan,
The Reward cost would be: 12 * ((20% * $25) + (20% * $25)) = $120 per referral
Put your referral program idea to the test!
Our SaaSquatch Referral Program ROI Calculator is a best-in-class tool that uses data mined from our very own data warehouse to calculate the effectiveness and ROI potential of your referral program. Unlike other ROI calculators, our calculator incorporates real results from businesses like yours, resulting in an accurate model that you can rely on. With this referral program ROI calculator, you’ll be able to estimate the number of referrals, associated costs, and expected revenue generated by your program with confidence and accuracy.
Using our referral program ROI calculator is easy. Simply enter your program’s details, including the number of customers you have, the cost of your rewards for the programs, and the average lifetime value of each customer. Our calculator will then generate a detailed report that breaks down the expected ROI of your referral program, allowing you to make data-driven decisions and optimize your program for maximum results.
Don’t let the potential of your referral program go untapped. Download our referral marketing ROI calculator today and start increasing your referral program ROI with a successful referral program!