Having a referral marketing program is the first step in growing your customer base through your loyal customers. But how do you know if your referral program is working or not?
The secret to a successful referral program is keeping up with referral marketing metrics. Chief among those referral metrics is the referral program conversion rate.
In this article, we’ll explore how referral marketing works and how to create a successful program using metrics. We’ll also focus on the referral program conversion rate metric and provide you with tips to ensure your referral program is top-notch.
How does referral marketing work?
The best way to use referral marketing in your e-commerce store is to use a referral program.
Referral programs are the measurable form of word-of-mouth. In the past, people told each other about this store they visited, what they bought, and how they highly recommend their friends check it out too.
The problem with word-of-mouth marketing is that it isn’t measurable.
You can’t tell if people were coming to your store because one of your customers referred you or because people just liked what was on display, so they decided to explore your store.
Fast forward several years and referral marketing is an inexpensive marketing and sales tactic. Referral marketing helps businesses acquire new customers, increase their sales, and boost customer satisfaction and loyalty.
What is a ‘successful’ referral?
In a referral program, there are 3 main stakeholders:
- You, the store or store owners
- The referrer, that’s your loyal customer who is referring you to others
- The referred, that’s your loyal customer’s friend or family member who visits your store after an invitation from their friend.
To ensure you have a successful referral program, you need to understand what makes a referral successful.
Your referral program shouldn’t only help you increase your customer base, but also boost your sales.
A successful referral is, therefore, one that signs up to your online store or mobile app AND completes their first purchase.
That’s why one of our referral marketing best practices is giving the referred person an incentive to complete that first purchase. It could be a first-time coupon, a sign-up reward or discount, or even a first-time free shipping offer. It’s up to you.
As a business, you should be able to track some metrics from your referral program dashboard. These include:
- How many ‘successful’ referrals each customer has made
- How many of those referrals are active in a specific period (3 or 6 months)? How many aren’t active
- Your referral rate (also known as your customer referral rate)
- Number of people referred in a month/quarter/year
- Participant conversion rate
- Participant share rate
What is a conversion rate?
The conversion rate is the percentage of customers who ‘convert’ by completing an action after clicking a link or ad. A conversion doesn’t necessarily have to mean completing a purchase.
A conversion can include signing up for an email list, downloading an e-book, or something. Or completing a purchase.
Here is Google’s definition of a conversion:
“An action that’s counted when someone interacts with your ad or free product listing (for example, clicks a text ad or views a video ad) and then takes an action that you’ve defined as valuable to your business, such as an online purchase or a call to your business from a mobile phone.”Google
How to calculate your e-commerce conversion rate
To calculate your conversion rate, you’ll need to divide the total number of conversions by the number of engagements or interactions in a specific time frame. Then multiply the result by 100 to get a percentage.
If you got 40 conversions from 1,000 interactions, then your conversion rate is 40/1000 x 100 = 4%
What is a referral program conversion rate?
The referral program conversion rate is the percentage of successful referrals made by customers via your program.
They are the referred friends who arrive at your website, online store, or mobile app, and convert by completing a purchase.
How to calculate your referral program conversion rate
To calculate your referral program conversion rate, you’ll need to divide the number of referral purchases (those purchases coming from referrals) by the number of referral shares (the number of shares or links shared by your customers). Then, multiply the result by 100.
Referral program conversion rate = Referral purchases ÷ Referral shares x 100
Referral program conversion rate vs referral rate
It may sound confusing. That’s why we want to clarify these two related metrics.
The referral program conversion rate measures the percentage of new customers who have converted after they were invited to check out your store.
On the other hand, the referral rate is the percentage of purchases that comes from your customers’ referrals.
To calculate your referral rate, you’ll need to divide the total number of referred purchases (those made through your customers’ successful referrals) by the total number of purchases. Then, multiply the result by 100 to get a percentage.
If you get 100 sales in a month, you can see how many of those came through referrals. If you get 20 referred purchases during that month, then you’ll need to divide 200 by 1000 = 20%
This 20% is your referral rate.
It’s worth mentioning though, that the average referral program conversion rate is 2.35%. So, you want to be close to that number.
Referral marketing terms you need to know
There are a few more terms associated with referral marketing that you should know. This ensures you don’t get your data or metrics mixed up.
These referral-related terms are:
The referral code is what your customer uses to invite other customers to join your referral program. Usually, this referral code is shared as part of a referral link.
Each customer gets an auto-generated referral code. As a business owner, use referral tracking to see how many new referrals each customer has made using their unique code.
The referral link is the link your customer shares with their friends and family. Once these people click the link, they’re taken to your website and asked to sign in.
While they’re signing in, they add the referral code embedded in the referral link they click. Alternatively, the referral code may be added directly in the referral ‘box’ as part of their sign-up form.
When a customer shares a referral link, it automatically includes this customer’s unique referral code.
The term referral tracking covers all the data you collect as part of your referral marketing process. Referral tracking begins with a referred customer signing up to your website using a referral code to them sharing their own referral code or link with others.
It also involves actions taken by that referred friend, such as making a purchase, adding products to a cart, among other actions.
In addition, referral tracking data shows you your active customers and their active referrals. You can review all your referral data from your referral program dashboard.
Referral marketing automation
To create a successful and effective referral marketing program, it’s best to use referral marketing automation. Referral automation is software that helps you automate your entire referral marketing process.
Gameball acts as a rewards and referral marketing automation software.
Using Gameball, you don’t have to worry about generating referral codes and links. They’re automatically generated.
You can also review your referral program metrics directly from your dashboard, see which of your customers are actively referring you, and so on.
Further reading: Referral Marketing vs Affiliate Marketing: Here’s What You Need to Know
The term referral traffic refers to the people clicking referral links. You can see in your traffic sources the percentage of traffic coming from referrals, social media, your paid ads, and so on.
How to get referrals for your e-commerce store
While we have a full article on how to get referrals, here are a few of those ideas:
1. Create shareable experiences
If a customer enjoys an experience, they’ll want to share it with friends, family, colleagues, etc. This involves creating personalized experiences, offering rewards and perks, and more.
2. Offer great customer service
We can’t stress this one enough! The secret behind the success of many businesses many not be stellar products. Their customer support—or customer success—team are the ones that work the real magic.
The difference between a WOW brand and a mediocre brand is often customer support.
A brand that offers unique products but has poor customer support will create a hype at the beginning but will die out soon because customers are struggling with their orders, their returns, their refunds.
It’s a hassle, and no one wants to buy from a brand where the experience is a headache!
Make the return on experience count for your customers.
3. Make reviews work for you
Make sure you get reviews and testimonials from your customers—especially after a positive experience. Then use their reviews to entice more customers.
Reviews act as social proof. They tell people that others like them are enjoying your products too.
Referral marketing tips to boost your referral program conversion rate
Now, let’s explore some referral marketing tips to increase referrals and accordingly your customers and your sales.
These are some of our referral marketing best practices.
1. Combine your referral program with a loyalty program
Customer loyalty programs work perfectly with referral programs and vice versa. Using a loyalty program also allows you to offer various kinds of incentives to your customers.
You can vary your referral incentives from points to instant rewards to something else.
2. Give customers a reason to refer you
While customers may love your products and their experience with you, you still need to give them a reason to refer you. That’s why we recommend rewarding customers for their referrals.
The two most commonly-used referral rewards are cashback rewards and loyalty points. See how many points you can give customers for successful referrals. Could be 100 or 150 points. That way, when they complete 4 or 5 successful referrals, they can be eligible for a reward such as a discount.
3. Make it a win-win for all!
Another recommendation from the Gameball team is to reward everyone. Don’t worry, we won’t break your bank. But for this we recommend rewarding your loyal customer who recommended you to others, and their referred friend or family member.
This is what we call a sign-up reward. The referred party gets a first-time discount or coupon or free shipping option. This gives them a reason to not only sign up to your website but also complete their first purchase.
Once a new customer completes their first purchase, it’s like they’ve broken a trust-barrier. They’re able to experience your products first-hand and get rewarded in the process.
Using referral incentives offers a unique opportunity to build loyalty and increase customer satisfaction from the beginning.
Faster customer trust is one of the top benefits of referral programs.
The most customers trust you, the more they’re likely to buy from you and recommend you to others.
A simple referral program can create a cycle of referrals and customer loyalty that translate into revenues, sales, and positive reviews for your e-commerce business.
To ensure your referral program is effective, keep an eye on your referral metrics, specifically your referral program conversion rate.
If the latter isn’t performing well, then maybe it’s time to run a referral marketing campaign, add more referral rewards, or both.
Want to see the power of referral marketing in action? Add Gameball to your website, mobile app, or Shopify store.
For Shopify store owners, you can grab Gameball via the Shopify app store.