Rethinking Referral Marketing (Part 9)

The second issue with current referral programs is that they do not offer rewards based on the lifetime value of the referred customer. So, all that one gets as a referrer is some small one-time incentive – either a cashback or a free ride or some additional points. None of this is exciting to make referral marketing a key plank in new customer acquisition. It thus ends up just becoming another checkbox in the marketing toolkit.

Customers have different lifetime values. When a new customer comes in through a referral, the brand is not incurring marketing costs in acquisition. It can thus afford to reward the person the referring customer.

Let us take an example. Suppose the lifetime value of a customer just acquired is Rs 20,000. A brand may have spent Rs 2,000 or so in acquisition costs as part of a marketing campaign. Instead, it now no longer has to spend all of that money. It could take some part of the money saved and split it in three ways: give both the existing referring customer and the newly acquired referred customer the same initial incentive of say Rs 300 (for a total spend of Rs 600). It could then allocate 5% of the future spend by the new customer as an incentive to the referring customer, who would thus earn Rs 1,000 in the coming months and years. This creates a substantial incentive and encourages the best customers to make sure they get more future best customers. [A point to note in the example above: the payment need not necessarily be in cash. It could be through an alternate currency (virtual coins, points, etc.) also.]

Taken together, the first two solutions offer a big upgrade to existing referral programs. The focus on best customers ensures that the brand can get more higher value customers. The incentives offered by giving rewards linked to the lifetime spend of the new customer also ensure that quality is emphasised over quantity in the referral process.  Our next upgrade to the referral marketing will, quite literally, take it to another level.

Tomorrow: Rethinking Referral Marketing (Part 10)

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.