Spend management 6 min read

How to budget for your B2B referral program

Amy Geist

As a business owner, you always take great care of your customers. You've built a loyal following of clients, enthusiastic about your products and services. Some even share their love for the world to see.

It's almost like having an extra sales force on standby. 

And it’s about time you tapped into some of that goodwill and created real advocates.

The benefits of a referral program are well known. In fact, word-of-mouth marketing is one of the most cost effective marketing strategies a company can invest in. 

And if you haven’t added one to your marketing arsenal, you could be missing out on some easy revenue.

Unfortunately, depending on how many marketing channels you’re already using to acquire customers, your marketing dollars could be stretched thin. So we’re here to help you budget for your own B2B referral program. 

But first let’s make sure we get some terminology straight.

New call-to-action

What is referral marketing?

Content marketing and social media marketing command a lot of attention in the digital marketing space. And they probably account for a lot of your marketing budget.

It’s understandable if you haven’t put much thought into referral programs. They’re just one of many marketing channels. And they’re built on the concept that people love sharing positive experiences.

Well, at least theoretically.

For whatever reason, when it comes to talking about positive experiences with products and services, people just don’t get around to doing it. 

In fact, even though 83% of satisfied customers say they’re willing to refer products and services, only 29% actually do. 

Simply asking customers to refer their friends clearly isn’t enough, which means there’s a lot of revenue being left on a table somewhere.

Luckily, your customers only need the right nudge to bring that revenue within reach.

That’s where referral marketing comes in. It's basically incentivizing customers to refer your product or service to their friends. Here’s how Zoho Mail gets their customers to recommend them, for instance:

zoho-mail-referrals

Now let’s go over what you have to consider when budgeting for a B2B referral program.

Key numbers for B2B referrals

You need to know a few key metrics within your business. They’ll help you decide how much money you can spend on a company referral program. 

Customer acquisition cost (CAC)

CAC is simply the cost of convincing a customer to buy your product or service. It’s a way of measuring the value of one customer.

Of course, you want your CAC to be as low as possible. But if it’s higher than it should be, that doesn’t mean you should scratch the idea of a referral program.

Since referral programs are powered by word of mouth, you can expect to lower your CAC - often dramatically - after you’re up and running

Customer lifetime value (LTV)

The LTV of a customer, or the revenue you’d expect over your entire relationship is also important. 

Obviously you want a high LTV, much higher than the customer acquisition cost.

Referral programs also have a positive impact on LTV. Incentivizing your customers is one more way to keep them satisfied. 

And satisfied customers stick around and keep buying from you.

Product margins

To be effective, a program must provide enough incentive to make your customer spread the word about your product or service. 

Knowing your product margin, or profit margin per product, will determine whether you can provide a meaningful reward.

Of course, the reward shouldn’t cost more than your markup

A high-margin business is always ideal so that your brand can offer lucrative rewards to referrers. But, if you don’t have a high-margin business by default, you can consider adding educational products such as online courses to your product offerings.

Typically speaking, those who develop online courses have very high-margin businesses, as there are low recurring costs to the business model.

Why this is important

Knowing these numbers will help you determine how much you can spend on the referral program software and customer rewards without eating into your profits.

Analyze your marketing spend

There are tons of different ways to reach your audience. And you’ve probably invested marketing dollars in a number of them.

But not all of them may be effective. Some of those dollars could be put to better use with a referral program. 

Where is your money going?

Take a close look at all the marketing channels you’re using to attract customers. Be sure to consider both in-person and online channels, including:

  • Pay-per-click (GoogleAds, Facebook)
  • Social media 
  • Email marketing
  • Your website 
  • Content marketing and SEO 
  • Physical marketing (signage, trade shows, brochures, free consultations)
  • Paid advertising (podcast ads, print, radio, TV, affiliate marketing)
  • Conferences & speaking engagements, trade shows, sponsorships

Then try to measure the number of new customers you’ve attracted through each channel.

Evaluate their effectiveness

It’s not always easy to pinpoint where your customers came from. At least customer analytics can help evaluate the effectiveness for online channels. 

Still, try to measure the CAC for each channel as best you can. Stick with those with the lowest CAC and consider redirecting the funds spent on poor performers to a referral program. 

We’ve already mentioned that referral marketing is one of the most cost-effective marketing channels. In fact, a Software Advice survey (below) found that 78% of B2B marketers find that referral marketing produces ‘good’ or ‘excellent’ leads.

That alone could convince the person holding the purse strings to consider a referral program. 

Plus, a referral program is automating a critical business process, lead generation — something your company pays to do with other processes.

Why this is important

First of all, it’s just a good exercise to periodically evaluate the effectiveness of your marketing channels. It's important to get an idea of what’s working and what isn’t. That way you can make the best use of your marketing budget.

Redirect funds to a referral program, and it could easily become your biggest customer acquisition channel. 

And given their low cost, it could reduce the combined cost of all your marketing activities.

Analyze how much you can afford to give out  

The more attractive the reward, the more your customers will want to refer your product or service. 

Ideally you’ll be able to offer at least 10% in referral rewards. Businesses that incentivize at this level enjoy better referral rates. 

If you can offer more, your referral rates will be even better.

For established businesses with satisfied customers from existing marketing channels, you can expect to increase your sales by about 2%. 

Whether you give rewards in cash or as a percentage discount is up to you. Typically, companies give discounts for repeat purchases and cash for more infrequent ones:

Source: booker.com

While waiting for a thumbs up to move forward with a program, get a head start thinking about how you’ll reward your customers with this epic list of referral program ideas

Calculate the potential ROI of the referral program

At this point you’ve started to think about how you could redirect marketing dollars to a referral program. And you’ve considered the value of incentives you’d be able to offer.

Now let’s consider the potential ROI for your company referral program.

First, you’ll need to determine the overall cost of the referral app to make it fit your budget. The best way to do it is to use the right accounting software, that can allow you to understand your finances.

Those costs may include:

  • Setup time - short for most “set it and forget it” apps 
  • Referral app cost - typically monthly
  • Commission rate for each referred customer - often a sliding scale
  • Incentives  

Next, estimate your potential revenue by using a referral rate of 2.3%, the global average of program users across six industries. Multiply it by your monthly sales revenue.

Then use the following high-level ROI computation for budgeting purposes:

    Monthly sales revenue X .023 = referral revenue potential

     Less cost of the program

   = net income

    ROI = net income/cost of program X 100

Get busy rewarding

Now that you know how to budget for your company’s referral program, it’s time to mobilize the troops. 

Gather your advocates, launch your program and unleash your incentives. 

And watch the revenue roll in. 

Whether you find the dollars by eliminating poorly performing marketing channels or you create a compelling ROI, with proper planning and execution your referral program will be a success.

New call-to-action

Spend management Marketing spend
Stay in the know

The latest spend management insights. Straight to your inbox.

rocket

Amy Geist

Amy Geist is a content marketing writer for ReferralCandy specializing in digital marketing, health & wellness, and lifestyle. Find her on Linkedin or amygeist.com.