Happy customers become brand advocates and spread the word. This “word of mouth” marketing is explored in the Referral stage of the marketing funnel.
The Referral Stage
This is often the most overlooked and underappreciated stage of the AAARRR funnel. This is where your existing customers refer your product or service to their friends and family.
“Everyday startups” really started talking about the Referral stage of the funnel after some big successes came from the likes of Dropbox’s “invite friends and earn more storage” campaign that led to 3900% growth within 15 months and later, Uber’s ‘refer and earn free rides for both you and your friend’ campaign.
There are some key data points and rationale that show the effectiveness of referrals:
- Referred deals are usually closed faster than deal sourced from other channels
- The lifetime value of referred customers is usually higher than non-referral clients
- Most people trust recommendations from people they know compared to ads
Organic content channels such as email and social media and often used to run referral campaigns alongside in-app and in-platform promotions.
Metrics to Measure Referrals
Referral marketing metrics are best defined specific to the campaign you’re planning to run. However, there are some key metrics that can help you measure your overall referral effectivess.
Some of the referral metrics are:
- Number of active users sharing invites
- Referral link CTRs
- Invitees per referer
It’s also important to track metrics from other stages of the marketing funnel separately for the referred user segment. This helps compare customer behavior of customers that come from referrals vs non-referred customers.
Since referral campaigns will again lead to Acquisition, Revenue, and Retention (and potentially more referrals), you can track metrics in those stages again for the referred customer segment.
For example:
- Churn rate of referred customers
- Retention rate of referred customers
- Lifetime value of referred customers
The key idea here is to segment your referred customers and measure their behavior vs non-referred customers. You can also create multiple referred customer cohorts within the segment to track customers referred during different times.
The Viral Coefficient
As referral programs grow, you’ll hopefully notice the “viral” addition of customers as a result. “Viral” is anything that is created through spreading across from one to many. The viral coefficient measures how well your referrals are converting.
It takes into account both the number of referrals as well as the conversion rate.
Viral Coefficient is calculated as follows:
Viral Coefficient = (# invitations sent per customer) X (% conversion rate of the invitations)
This can give you an outlook on how well you can acquire viral growth through referral campaigns.
It’s also important to consider the Viral Cycle Time along with the Viral Coefficient to get a complete picture of HOW WELL and HOW FAST your startup or business can grow using referral marketing.