Rewards and loyalty can be one of the most interesting areas of business growth; they combine the hard numbers of quantitative analysis with the softer areas of psychology and social science.
Rewards are one of the key considerations in creating a referral program to supercharge your business' growth. But how do you get it right?
Here are some tips on how to use rewards to drive referrals for your business, in particular:
- how to choose the structure of your rewards program; and
- how to choose the rewards.
Structuring Your Rewards Program
The big question here is whether you create a "single-sided" or "double-sided" rewards program:
A single-sided program rewards either the person making the referral or the person being referred, but not both. A double-sided program rewards both.
To decide which one works best for your business, you need to understand whether:
- giving a reward or discount to the potential new customer will actually increase sales. If it will not, there may be no reason to erode your bottom line by offering an incentive to the buyer. You can test this fairly easily using a standard A/B test with purchasers that have not been referred. For example, offer an incentive to a group of buyers (Group A) and no incentive to another group (Group B) and monitor the effects on conversion rates.
- you expect most of your referrals to come from existing clients. If this is the case, unless there is a good reason not to (see the point above), a double-sided program is usually best as it can increase loyalty as well as driving new business sales.
- rewarding your potential referrers will make them more likely to refer. Some people/industries want to add value to their network by being a problem-solver – even for issues outside their core expertise. For these types of referrers, a reward will unlikely move the needle. Focus should instead be placed on building their trust in your business, educating them on what you do, but most importantly, giving their referrals a killer client experience.
The second key structural choice you need to make is when the rewards are granted, or, put differently, what is the behaviour you want to reward? Now, you don't need to run a Pavlov's-dogs-level experiment here, but you need to find a balance between:
- your ultimate goal (e.g. drive new sales);
- the point in your sales process you can reasonably expect your referrers to participate;
- the value of referrals at each stage of your sales process (i.e do you convert most of your leads or do you rely on high lead volumes? The answer can tell you whether it's better to reward for leads or for sales); and
- how much effort is required from the referrer compared to the value of the reward.
How to Choose Rewards
Picking your rewards is the fun part.
A useful framework for choosing rewards is this:
- Determine how much you can give away to set your budget;
- Understand what type of reward motivates the people you are rewarding;
- Where possible, pick rewards that have a higher perceived value.
Let's go through each of these in turn.
1. How Much Can You Give Away?
To decide how much you are willing to invest in rewards, you will want to weigh up your:
- customer lifetime value (CLV). CLV is how much you will earn from your average customer over an unlimited time (i.e total value of all transactions, including return business for a customer) You need to ensure your customer acquisition cost does not make you unprofitable (unless, of course, you don't care about that at this stage in your growth); and
- customer acquisition cost (CAC). This is how much it costs you to acquire a customer. It is often calculated by adding up all sales and marketing costs (eg. advertising, marketing and sales staff salaries) and dividing this by the number of customers you acquire – but you can also segment CAC on a channel-by-chanel basis to see which channels deliver the best ROI.
The reason that looking at your CAC from other channels is important is because:
- you will often be able to switch out a lot of this cost to make room for your reward (referrals can eliminate a lot of the costs associated with acquiring customers through alternative channels; for example, advertising and marketing cost. They also tend to have a higher conversion rate, ultimately further reducing CAC);
- even if you do not have a goal to activate more cost-effective channels than the ones you currently have, it's helpful to benchmark referrals against what you are already doing.
Why Bother If It Is More Expensive?
You might ask why you would want to activate a new customer acquisition channel if it is not more cost-effective than your existing channels. Three possible reasons are:
- it may allow you to access a market or client base that your traditional efforts simply cannot reach (e.g. people that aren't seeing your marketing or advertising);
- you find that referred customers end up being stickier (i.e they are less likely to cancel and have a higher CLV than your usual customers); and
- the higher conversion rate of referred customers might surprise you – making the channel more cost-effective than you initially thought (i.e by lowering the CAC).
Once you know your budget for rewards, you can now work on setting rewards at the right level. Remember that:
- there will always be a natural limit to how much a person can actually refer; and
- there will be an optimal reward level that maximises profit from sales (in this sense it's not dissimilar to finding the optimal price for your products/services).
Unless you are only concerned with increasing revenue or customer numbers, the goal should be to find the optimal reward level so as to maximise profit. As with pricing decisions, this will often take a bit of experimentation to nail. However, there are a couple of golden rules that can help in setting reward value:
- do not give away more than is needed to generate the maximum number of referrals (to avoid unnecessary erosion of your bottom line); and
- do not (with limited exceptions) give away so much that you are paying more for sales than you will earn in customer lifetime value.
2. Choosing Reward Types
Once you know how much you can/should spend on rewards, you can explore what you actually want to give away. Why not just cash, you may ask? Well, it's reasonably well-established that cash rewards are not as effective as other reward types.
Some common ideas for non-cash incentives include:
- credit for your products or services (good for existing customers);
- third-party products (e.g movie or event tickets, store vouchers, airline loyalty points, etc.). This is a good approach if you are a relatively unknown business as you can lean on known brands. It can also work well if you offer services that people may not be excited about purchasing (such as accounting services); and
- charitable donations (we love this approach and use it as part of our referral program at LegalVision).
You should be guided by your research and knowledge of your customer here in terms of what they want. Here are three ways to zero in on both optimal reward level and reward type:
- Conduct market research on what your competitors or companies in comparable industries are doing (ie. "best practice");
- Ask your customers what they would want (focus groups of promoters can be useful here); and
- test in live A/B test environments with partner or client groups
Better yet, combine all of these and get creative.
3. Picking Rewards With Higher Perceived Value
If you do not use cash, there is a great opportunity to choose a reward that has greater perceived value than what it costs you.
- rewards points or credits for your business do not cost you their retail value. Yet the customer perceives $100 store credit as worth $100;
- a ticket to an exclusive premier may only cost you $60 to secure, but its unavailability on the open market gives it a higher value to the customer receiving it; and
- the feel-good factor that comes from a customer knowing they supported a charitable cause is often perceived as more valuable than the cash value of money donated.
Choosing rewards that have these attributes can allow you to reduce the cost of acquiring customers through referrals. It can also allow you to increase the value of the reward to hit optimal reward levels where you otherwise may not have had the budget (in cash) to do so.
Creating a powerful rewards program to drive referrals for your business can be very, well, rewarding. To do it well you need to:
- understand your numbers. How much can you give away and how much should you give away to maximise your results? Customer lifetime value (CLV) and customer acquisition cost (CAC) are the workhorses here.
- know your customers and partners. Know what motivates them so that you can give it to them!
- pick rewards that have a high perceived value to make your program as efficient and effective as possible.
At LegalVision, we use donations as a reward for partners that choose it – planting groves of trees every time someone is referred, but also as long as they remain a member with us. You can even view our forest here. Pretty cool? We think so.
Lastly – a quick note from our lawyers: make sure you have researched and are across the legalities and obligations of giving or receiving rewards in your industry and in your location. If you are unsure, seek advice before launching your rewards program.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.