How to increase customer lifetime value with referral marketing
Read time: 8 mins
Did you know that acquiring a new customer can cost five times more than keeping an existing one? With so much competition for eyeballs, it’s unsurprising that customer acquisition costs have risen 222% by one estimate in the last decade.
If you can nurture your existing customers, offering them unrivalled CX and making them feel valued, you can extend the value they provide to your business over a much longer period. Not only that, if you can turn them into enthusiastic fans of your brand, you can extend that value to the people they talk about you to.
Referral marketing provides a way to consistently and methodically reward your most enthusiastic customers, maximising the value of their own spend and that of the people they recommend you to.
The importance of customer lifetime value in marketing
Customer lifetime value (CLTV) lets you view marketing efforts in terms of long-term value and profitability. It shifts the focus from a zero-sum game of simple transactions to building lasting, valuable relationships with customers.
Taking CLTV seriously allows you to:
- Make more informed decisions about budget allocation.
- Increase profitability by focusing on long-term relationships.
- Identify your most valuable customer segments.
- Design better customer segmentation and targeting.
- Prioritise customer retention strategies over straight acquisition.
Understanding customer lifetime value
In simple terms, CLTV represents the total net profit you expect to earn from a customer throughout your relationship. It’s an essential metric to understand because it quantifies the worth of the customer over the whole lifespan of their interaction with your brand.
How do you calculate customer lifetime value?
CLTV is made up of three elements:
- The average value of a purchase
- The average number of times a customer buys in a given period
- The average length of the customer-business relationship.
Taking these three elements together gives you a holistic view of the customer's value and a clear metric on which to focus your efforts.
Calculating CLTV can be approached in different ways, but a basic formula to start with is:
Let's say it costs £50 to acquire a new customer. If that customer typically spends £100 on each purchase, buys three times a year, and remains loyal to your brand for an average of 5 years, their CLTV would be £1,450 (100x3x5-50).
This gives you a good starting point for benchmarking your CLTV. Of course, there are more complex calculations that factor in variables like ongoing marketing costs. As your business grows and you get more detailed data, you’ll be in a better place to refine how you calculate CLTV. We recommend checking out this infographic by Neil Patel to explore this in more depth.
How referral marketing increases customer lifetime value
Referral marketing capitalises on trust and social validation, creating more engaged and enthusiastic customers who are more likely to spend more with your brand over the long term.
There are three main reasons why referred customers are such good news for your business’s bottom line.
- They’ll trust you more—On average, a referred customer spends 15-25% more on their first order. That’s because a customer referred by a friend is predisposed to liking and trusting your brand before even making a purchase. They’re not coming to you cold, they’ve landed at your door as a result of a personal, emotional connection.
- They’ll be a better fit—New customers acquired via existing ones are much more likely to fit your ideal customer profile, decreasing the chances they’ll be bargain-hunters looking for a one-off purchase and increasing their value to your business. Not only do they spend more straight off the bat, referred customers also make significantly more repeat purchases.
- They’ll play it forward—When someone does you a favour, naturally you’ll want to reciprocate. Referrals are 3x more likely to go on and recommend your brand to someone else, so they too can benefit from the introduction.
Key metrics for measuring referral marketing success
To truly measure the effectiveness of referral marketing in boosting CLTV, you need to dig into some specific metrics.
These metrics not only gauge immediate returns but also the long-term impact on customer relationships and profitability.
- New customer acquisition rate—Boosting your acquisition rate while driving acquisition costs down is decisive for profitability. Mention Me’s referral marketing system drives up to 30% increases in new customer acquisition.
- Average order value (AOV) of referred customers—While not losing track of the long-term value of your newly acquired customers, you need to keep tabs on their spending in the here and now. On average, referred customers have an 11% higher AOV than other customers.
- Onward referral rate—With customer referral programs, the aim is to create an onward chain of goodwill. Referred customers are 5x more likely to refer onward, helping you build a community of people who love and advocate for your brand.
- Paid advertising conversion rate—If you’re tapping into a network of fans and advocates, your paid ads don’t need to do as much heavy lifting. Instead, ads can reinforce the positive messaging from personal connections. Mention Me’s referral marketing tools have helped our clients achieve a 65% increase in conversion rates from their paid social media ads and a 15% reduction in CPA on social.
- Churn rate of referred customers—Look at the percentage of referred customers who stop buying or engaging with your brand over a specific period. If this is lower than your average churn rate, it means your referral program is building significant brand loyalty.
Why referred customers truly maximise value
In a world where the cost of acquiring a new customer has skyrocketed, focusing on amplifying the value of our existing customers is not just smart—it's essential.
Doing this in a way that creates trusting and loyal fans and turns them into enthusiastic advocates is how to increase customer lifetime value. After all, the most influential ads aren't the ones we create, but the endorsements our satisfied customers share.