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Calculating Referral Rewards Structure

Calculating Referral Rewards Structure

It's starting to thaw outside, and with thawed earth and melting grass comes one important thing. Spring sports!

One problem...

You won't be able to get to your children's soccer games on time. That's because you are busy indoors twisting pixel knobs and flicking digital switches. Adwords, Retargeting, SEO, Email... How on earth do marketers get out of work by 5pm?

They spread the workload. They create a passionate army of brand ambassadors to help them evangilise their product. The best part? With a little bit of math it can be foolproof.


Understanding Your Customer Acquisition Cost

Once you have calculated your customer acquisition cost, or CAC for short, choosing a financial commission structure for your referral campaigns is easy. Here is how to calculate your CAC for each of your marketing channels.

  • SEM/Adwords

One of the reasons why marketers love Adwords is because it is easy to calculate your ROI. At the simplest, divide the number of customers acquired via SEM by the amount of money that you spent on Adwords.

Unfortunately, that is where the simplicity ends, unless you don't plan on optimizing your campaigns.

For each campaign, you will have a calculated click-through-rate (CTR), and then once a user lands on your site, you will have a different conversion rate (C%). Some pages may have higher conversion rates overall, however not every campaign will match up with every landing page.

And then there's the keywords.

Finally, you will want to continue to measure and calculate your customer lifetime value (CLTV) so that you know that you are getting quality customers that will hopefully increase your CLTV.

That means in order to optimize your Adwords account you will need to attempt to simultaneously improve the CTR of your campaigns, and the C% of your pages, match each up correctly.

  • Display/Retargeting

Display can be a good source of ad spend, especially if you need to create brand awareness. Paid search advertising is good for products that people are searching for, but what about products that fill an unmet need? For that you need brand awareness.

Display advertising also offers inexpensive ad impressions, but impressions don't = clicks, and clicks don't = conversions, and conversions don't = low churn.

Furthermore, display catches people at an inopportune time. We all wear many hats at many times during the day, we are employees, bosses, sons, wives, brothers, and independent people that just want to be entertained. We can be wearing any one of those hats at any given time. We are probable not in the mood to be sold to if we are caching up on the 32 Pictures You Need To See Before The World Ends.

Fortunately, display advertising CAC are easy to calculate as well, provided that you have setup your utm_ parameters correctly. Simply divide your total monthly ad spend by the number of customers you acquired during that time period. Better yet, calculate the CAC of each campaign in your display group.

  • SEO

SEO, or content marketing is probably the hardest customer acquisition cost to calculate. The hardest part about it is that you will probably have some top posts, but unless you are really scientific you don't know which posts those will be. For this reason, it is best to calculate the amount of costs you dedicate to your content marketing campaigns over a longer period of time (like a year), and then average the total cost over a shorter period of time (like a month).

The costs associated with SEO acquisition are also much harder to button down. Here are just a few of the costs that are associated with SEO:

  • SEO software
  • Content costs (if you hired for freelancers)
  • Content costs (time if you write your own posts)
  • Agency costs for optimizing your site or blog

Still it is very possible especially at a high level to calculate the customer acquisition cost of your SEO channel.


Opportunity Costs & What to do with the numbers?

Opportunity cost is the difference in gain, from choosing one activity over another. Let's say that you are successfully running an adwords campaign with a customer acquisition cost of $5, a SEO program with a CAC of $10, and a retargeting campaign with a CAC of $15. Now assume that you have a $30/day operating budget. How are you going to spend your money?

$30 straight adwords.

Unfortunatly, digital marketing doesn't work like that, and you need a healthy marketing mix to acquire customers.

However, you could still setup a referral program, and structure the commissions at $5. With a referral program you get to decide the terms of the program. Both the commission, and the conversion event, like acquiring a new customer.

Since you only pay out your commissions when a user completes that specific conversion event, setting the program up for $5, or the minimum CAC you calculated earlier is a no brainer, and you don't lose any budget (assuming you have a positive ROI, if not you are in trouble), to other channels.

Even better, while a strong customer referral program is not maintenance-free, it is extremely scalable. The ROI on your time-investment increases exponentially with each new ambassador that you add to your team.

Furthermore, if you have good product/market fit, or a high Net Promoter Score® your customers are probably already sharing your product or service. You just aren't tracking it.

Now, just because a few of your customers are sharing your product or service, most of them are not. Which is exactly why you need a referral program. According to a study, while 83% of customers are willing to make a referral after a positive customer experience, only 29% actually do.

Use your new-found metrics to motivate them risk free.

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