Strategic Referral Marketing: Maximising ROI through Customer Advocacy
Read time: 16 mins
In today's competitive landscape, customer leaders and marketing executives are constantly seeking innovative strategies to drive growth and increase profitability. While many brands focus their attention on acquiring new customers through paid channels, the path to success often lies in harnessing the potential of your existing customer base.
Imagine turning your happiest customers into passionate advocates for your brand, who not only boost your revenue but also bring their friends. This article is your roadmap to unlocking the value of a strategic referral marketing programme that maximises ROI through harnessing the power of brand fans.
What is Referral Marketing?
Referral marketing is about encouraging your existing customer base to tell their friends about your brand. It is a method of incentivising, recognising, and rewarding your customers for the indirect value they bring to your business.
Referral marketing operates on the principle that people are more likely to trust recommendations from people they know—friends, family, and colleagues—over traditional advertising methods. This trust can lead to higher conversion rates as potential customers are introduced to the brand by someone they already have a relationship with.
The Business Case for Referral Marketing
In the race to acquire new customers, the importance of retaining the ones you already have can easily take a back seat. Through referral marketing, companies can not only acquire new customers but also strengthen the loyalty of existing ones, ultimately building a more robust, customer-focused growth engine.
Quote from Fred Reichheld, Creator of Net Promotor Score
Indeed, Gartner research suggests that a large share of a company’s future profits (80%) come from only a small number (20%) of existing customers. This makes it crucial to know exactly which customers are the most valuable.
Increasing Revenue through Referral Marketing
Companies often use models like Recency, Frequency and Monetary Value (RFM) to find and segment their top customers — those who buy a lot and spend the most. But these models don’t always consider how many new customers these big spenders bring to your business.
Not having this data to hand means that you are missing out on valuable customer insights. Without knowing how much each customer really helps your business, you might allocate resources in the wrong places.
For example, think about Alice, who spends £500 a year with your brand. That’s not a huge amount, so she might not get special treatment like early access to sales or free samples.
But here’s the thing — Alice loves your brand so much that she’s brought in 10 friends, and those friends have brought in even more people. In total, these referrals have accounted for a whopping £5,000 in sales. That’s ten times more than you first thought Alice was worth. So, it’s time to give Alice some recognition.
On average, referred customers tend to:
- Spend 11 times more on their first purchase.
- Spend 8% more on future orders.
- Be 5 times more likely to introduce others to your brand.
Understanding this helps you sort your customers based on their true value. By focusing on your most valuable customers and giving them a great experience, you can build loyalty, encourage them to promote your brand and grow your business organically, even during uncertain times.
How Referral Marketing Maximises Lifetime Value
Customer lifetime value (CLTV) measures how much profit a customer brings to your brand, whether they shop with you for a day or stick around for decades.
If you’re into numbers, here’s how you can calculate it: CLTV equals the annual profit a customer generates multiplied by the number of years they stay a customer, minus the initial cost of acquiring them.
But if you stop there, you’re missing a crucial point: if a customer often recommends your brand to others, they’re probably more valuable than someone who spends more per purchase but doesn’t bring in new business.
Based on our experience with over 500 brands worldwide, we’ve discovered that referred customers can be gold mines; They have twice the CLTV compared to non-referred customers.
There are 3 big reasons why referred customers are great for your business’s profits:
- A customer referred by a friend already likes and trusts your brand before buying.
- Customers acquired through referrals tend to match your ideal customer profile, reducing the chances of them being one-time bargain hunters.
- People like to return favours, so they’re more likely to recommend your brand to others.
Extended Customer Revenue (ECR): A Key Metric
ECR goes beyond traditional revenue metrics by considering the long-term impact of customers’ referrals and advocacy signals. It’s called Extended Customer Revenue because it shows the revenue generated from the initial customer themselves and from those they refer and influence.
It tells you at a glance how much value your referrals are generating for your business.
Why ECR matters for ROI:
- ECR accounts for the indirect revenue generated through customer advocacy, making it a critical metric for understanding the holistic impact of advocacy programmes.
- It highlights the potential for exponential revenue growth. Satisfied customers refer new ones who, in turn, become advocates themselves.
- Tracking ECR allows you to allocate resources effectively to advocacy programmes and optimise their ROI.
So, when you’re planning your next marketing strategy, pay attention to your loyal customers. By harnessing and rewarding their customer advocacy, you can not only increase their CLTV but also attract more returning customers with healthy CLTVs in the process.
From Acquisition Channel to Marketing Strategy
Referral marketing is often seen simply as an acquisition channel, something to be bolted on to the end of your customer journey to incentivise new customers to spend money with your brand.
And to be sure, acquiring new customers is an important part of any referral programme. But developing a comprehensive referral marketing strategy that sees your customers as potential advocates for your brand and looks for ways to nurture your relationship with them is a far more effective long term driver of revenue and profitability.
So how do you build the relationships that will turn your brand fans into customer advocates?
Use your data to understand your customers
ECR is such a powerful metric because it lets you see how much value your customers are bringing into your business through referrals. Understanding this metric is a great starting point for understanding where your customers are in the referral journey.
To go back to our fictional example, when Alice refers her friends to your brand she goes from having a direct value of £500 to an ECR of £5000. That’s a significant amount of revenue that she’s directly and indirectly responsible for. To maximise Alice’s value, you need to do two things:
- Show her that you’re grateful
- Offer her more opportunities to advocate for your brand
Show your customers some love
There are many cases where customers have spent, shared and referred multiple times, then suddenly stopped. And there are several other cases where well-timed gifts or inclusion in VIP programmes have deepened customer loyalty and extended it far into the future.
A referral marketing strategy that allows you to identify who your most valuable customers are and reward their goodwill puts your growth on a much more sustainable footing.
Nurture your fans and turn them into advocates
If someone is referring you to all their friends, it’s quite likely that they are a big fan of your brand. Harnessing your customers enthusiasm and directing it to where it will have the biggest impact is the core approach of customer advocacy.
It takes a shift in mindset to fully realise the value in this area. The actual referral, where one customer takes advantage of a discount code or other incentive, is the endpoint of a long process. To get there, you have to build a relationship of understanding, recognition and respect. There are plenty of points along the way where you can encourage advocacy — a share on social media or by word-of-mouth is valuable in and of itself — regardless of whether it ends in a direct referral.
If a customer leaves a glowing review, or excitedly shares their experience of your brand with their friends, this is all great publicity. These moments are examples of customer delight, where you’ve done such a fantastic job that someone feels compelled to tell the world how great you are.
These moments of customer delight are key points of engagement. Experiment with placing referral prompts after a customer leaves a 5 star review or in an email after they’ve had a chance to fully experience your product or service.
There are some other significant ways you can nurture your customers:
- Loyalty — Advocacy and loyalty programs can be a powerful duo when working together. Target customers racking up the loyalty points with referral offers that drive them to refer friends.
- SMS — Send personalised reminders to share links and codes and increase conversion rates.
- NPS surveys — Promote NPS to gather and act on customer feedback. Turn NPS promoters into active brand advocates bringing in new customers.
Rebalance your Marketing Strategy and Reduce Spend
Engaging with your customers to get them advocating for your brand is the most direct customer advocacy strategy. It is also the cheapest. But beyond this, there are ways to use referral marketing to reduce the cost of your paid advertising, too.
Referral data can be a powerful tool in your arsenal to reduce the cost per acquisition (CPA) of a new customer and boost your return on ad spend (ROAS) across various marketing channels. Advocacy data enables you to target new customers more effectively, by using the data of your advocates to build a lookalike audience that matches their profile and attributes.
Let’s take paid social as an example. Incorporating first-party referral data into your paid social strategy allows you to pinpoint audiences who have a high likelihood of becoming valuable new customers.
This is especially valuable in the wake of changes like iOS 14. Brands have been able to enhance performance and generate immediate results on paid channels:
- Referrer lookalike audiences at menswear brand SPOKE convert 65% more and deliver a 30% higher ROAS compared to standard seed audiences.
- Sustainable deodorant brand Wild reduced CPA by 25% and increased the conversion rate by 17% by using referral data effectively.
You can apply a similar approach to paid search, leveraging first-party referral data to fine-tune your Performance Max audiences and bidding strategies on Google. If Google currently takes up a third of your paid advertising budget, even a slight improvement in conversion rates could significantly impact your profit margins.
Customer Advocacy as an ROI Multiplier
Working with your biggest fans to drive growth is a much more economical way to increase revenue than paid marketing alone. Developing a consistent method for doing so is key to seeing meaningful increases in ROI.
Analyse your Net Promoter Score
NPS is a metric that assesses consumer satisfaction and loyalty. It involves asking customers how likely they are to suggest your product/service on a scale from 0 to 10. Customers are then categorised into Promoters (score 9–10), Passives (score 7–8) and Detractors (score 0–6).
Why NPS matters for ROI:
- Promoters are your most loyal customers and can become valuable advocates for your brand. They are more likely to make repeat purchases and refer others, contributing positively to CLTV and ECR.
- By tracking NPS over time, you can gauge the effectiveness of your customer advocacy initiatives and their impact on loyalty and referrals.
- Improving NPS can lead to increased customer retention and acquisition, helping you improve customer satisfaction metrics, reduce marketing costs and boost ROI.
However, the real power lies in understanding why they gave a specific score and how you can shift more detractors and passives towards becoming advocates.
Mention Me’s advanced AI technology makes this possible. Through Sentiment Analysis, you can access authentic feedback from your real customers and highly engaged advocates shedding light on areas where you excel and areas that need improvement.
By gathering unique insights from your advocates, you can not only measure customer sentiments but also actively work to improve it, ensuring your referral programme is moving in the right direction, transforming customer apathy into advocacy and growth.
Here's Fred Reichheld, Creator of NPS on why you need to start tracking referrals now:
Maximise Profit through Advocacy Programmes
Bringing in loyal customers through referrals can set the stage for future full-price sales and repeat purchases, all without the need for costly paid advertising. However, neglecting to appreciate and reward your best customers may lead them to jump ship and seek alternatives elsewhere.
By investing in your marketing budget now, you can plant the seeds of referral success that will propel your business forward when the market is strong, and keep it stable in times of economic uncertainty. This approach not only helps you acquire high-quality customers but also provides you with valuable first-party referral data, ultimately boosting your return on investment (ROI) across various marketing channels.
Instead of purchasing customers, focus on earning them. Strive to deliver exceptional experiences and products that make customers proud to be a part of your community and eager to introduce others. When done right, this approach can kickstart a powerful cycle of growth that exponentially expands your business.
Key Metrics for C-Levels to Monitor
To assess the impact of your referral marketing and customer advocacy efforts, it’s crucial to establish clear, measurable objectives. These goals provide a concrete direction and benchmarks to measure the success of your programme. For example, you might aim to recruit a specific number of new advocates or acquire a predetermined number of new customers through direct referrals.
Measuring Referral Marketing’s Impact
As your advocacy programme continues to operate, it’s essential to assess its progress. Several metrics can help you gauge its effectiveness, providing deeper insights into the programme’s impact:
- Total Referral Revenue: This metric calculates the total revenue that can be attributed to your customer advocacy programme. It considers both the direct and indirect impact of advocacy on sales. Tracking revenue influenced by your advocacy programme helps you understand its financial impact on your business.
- New Referred Customers: The number of new customers obtained through referral which have successfully been introduced to your brand through your advocates.
- Share Rate & Conversion Rate: The share rate shows the percentage of customers who are actively sharing your brand, and indicates the traction of your programme. The conversion rate measures the rate at which you have successfully converted referrals to new customers. A higher rate is an indicator of more sharing from your advocates as well as more new customers joining your brand.
Regularly monitoring and assessing your customer advocacy initiatives’ performance ensures that you stay on track with your objectives and can make necessary, data-driven adjustments as needed. These metrics provide valuable insights into the programme’s financial impact, conversion rates, sales efficiency and customer satisfaction stemming from your advocacy efforts. By analysing this data, you can optimise your programme to maximise its impact on your business objectives.
Examples of Successful Referral Marketing & Advocacy Strategies
We’ve worked with hundreds of leading brands to increase revenue and boost ROI through referral marketing and customer advocacy. Here are just a few of their stories.
Case Studies in Customer Advocacy
PUMA has undergone a gradual optimisation of its referral programme with the assistance of the Mention Me team. Strategies adopted have involved:
- Promoting referrals through key touchpoints
- Pausing other competing promotions
- Conducting A/B testing with distinct user segments.
This approach has allowed the leading sports apparel company to gain a deeper understanding of its most valuable customers and what motivates them to take action.
One particularly enlightening experiment conducted by PUMA focused on testing the impact of ‘give’ versus ‘get’ messaging. This test was run across major European markets and revealed significant differences in behavioural patterns.
- German and French audiences were more motivated by the opportunity to give referral rewards to their friends.
- English audiences were primarily driven by personal rewards.
Armed with these valuable customer insights, the PUMA team crafted a customised referral campaign for each specific country. They tailored elements such as messaging and imagery to ensure the maximum word-of-mouth impact, and with the recent expansion of the referral programme to 19 additional countries, this personalised approach has proven to be instrumental in driving increased engagement for every campaign.
Having harnessed the power of customer advocacy within their referral marketing programme and other marketing activities, the company has recorded a whopping 6x return on investment.
Db, a prominent Scandinavian brand, describes Mention Me as “word-of-mouth on Red Bull”. Unlike platforms such as Google and Facebook, where diminishing returns are common, a referral marketing campaign has consistently delivered impressive results for the company.
By seamlessly integrating a referral marketing platform into its customer data system, the company was able to:
- initiate referrals
- Collect valuable customer data
- Administer efficient Net Promoter Score surveys
Personalised messaging, informed by NPS surveys and referral data, played a pivotal role in its strategy.
As a result, the company’s mailing list grew from 30,000 to 185,000 subscribers in a short period, with referred customers proving to have a higher CLTV than existing database members.
This case demonstrates how a well-executed referral marketing strategy not only yields immediate returns but also fosters long-term customer value, defying the diminishing returns often associated with other digital platforms. The company has had exceptional success, achieving a 5x ROI.
Practical Advice from Industry Leaders
“We’ve always known that word-of-mouth is an important marketing channel for building trust among our target consumers, but we hadn’t found a way to track and measure its impact — until now.”
Diane Larramendy, COO, Linxea
“During this tough economic period, we’re spending way less on sales and marketing than our competitors. Why? Because there is such a loyalty effect that our customers have with us and their willingness to refer. When your customers are continuing to come back and spend even in a difficult environment, there’s no better proof you should be focusing on customer love.”
Nate Henderson, CEO, BILT Intelligence Instructions
“By integrating customer advocacy data into our existing strategy, we’ve changed how we segment and communicate to our customer base. It’s helped us identify who our biggest advocates and most loyal customers are, helping us to overcome rising paid media and acquisition costs.”
David Witts, Senior CRM Manager eCommerce, PUMA
“Through our brand advocates, we’ve created an organic, scalable revenue stream. Customer advocacy has quickly proven to be a high-performing growth channel that acquires quality customers who spend more and share our brand with others.”
Ellis Hennebry, Senior Marketing Manager, COAT Paints
And that’s how referral marketing works its magic. It’s all about capturing and nurturing customer advocacy, keeping the buzz alive and recognising those who spread the word. We at Mention Me team up with brands big and small to seize these convos and transform them into fully fledged referral programmes. If that resonates with you, you’re more than welcome to book a free demo with one of our specialists who’ll walk you through everything related to our referral platform.