When it comes to calculating your ROI, you might imagine it to be a hectic math problem. It isn't. Think of it in terms of subtraction.
Or perhaps, cost and revenue. How much you have invested, and the revenue generated. If your income is higher than the amount you invested, it means the ROI is positive.
Numerous companies succeeded in the referral schemes, with significant figures as returns. How did they calculate their ROI? You can start an online spreadsheet referral software to calculate your ROI, or you can save one offline for future uses.
However, this article goes in-depth into how you discover what ROI your referral program has.
Calculating a New Customer's Lifetime Value
A Customer's lifetime value refers to the gain or profit which a customer can generate for a business. CLV is useful when making decisions that affect business processes like market strategy, customer service, and support, product development, etc.
Companies also decide how to assign funding for marketing campaigns through CLV analysis. Even the amount of money spent on each department and what to rank high as important. In an objective stance, the CLV appears to be a better fundamental facet of ROI.
It is because customers will purchase more and likely spread the word to their friends.
Calculating the CLV
When it comes to figuring your CLV, you have two particularly useful calculations:
There are two sub-methods under this method, and you will have to explore each technique for a better understanding.
To calculate your CLV, subtract the amount it cost to onboard that customer out of the company's earned income Tracking each customer might be hard, depending on the model your business operates on. Often, you might need to guess a customer's lifetime value for the best insight.
If for instance, you manage a gift shop and a gift item costs $40, and customers typically have a 2 in 20 chance of returning to the store. If you had spent $4 to get a new customer, you could find your CLV by dividing your average product price by two and deduct the RPR by 20%.
The calculation will show how much profit you will likely make from the client and help you to plan pricing, marketing, and others.
i: The technique entails dividing all of a company's revenue by the total count of purchases in the specified time. The period could be for one year. The result can be referred to as the mean purchase value.
ii: The quantity of sales has to be divided by how many individual clients that made purchases in the specified time. The result tells you the mean frequency of the purchase of your products.
iii: This step entails multiplying the APV by the APFR. The result is an estimate of customer value.
iv: This step tries to measure the number of years that a client will purchase your products. In other words, it estimates a customer's lifespan
v: Here, you multiply the CLV by the mean lifecycle.
This step will estimate how much you should look to benefit from the customer, i.e., Lifetime Value. The second process, on the other hand, gives a better analysis of a CLV. Because if it uses actual data, it becomes personalized to your business.
- Using customers' actual data
In other to calculate the lifetime value of your customer, you will need to find the average lifespan of the customer. This is done by analyzing the churn rate. It could probably be the number of customers who canceled their subscription, for example.
- Here is a sample case where customer data is used in calculating LTV
If you have 5000 subscribers and there were only 100 canceled subscriptions. Your monthly CR will be:
100*(100/5000) which amounts to 2%
In other words, your CR every month will be 2%. The CR can also be used to calculate the LV of a customer by dividing one by the CR gotten every month, to give 50 months in this case.
Calculating Reward Value (RV)
Your referral campaign has to be able to adequately compensate clients and supporters who have taken their time to referral people through follow up, phone calls, etc.
It should be mutually beneficial. However, it shouldn't negatively impact the ROI. in this segment, and you will learn how to compute the actual worth of a prize to clients.
Conversion depends on the amount of the reward. The highest conversion percentage ever recorded was 14%. It ranges from $42 and $102. Translation remains stable even after an RV of $120 to 7 to 8%.
The value of your reward and how it is calculated
To get the best result in your program, you must have a precise time, like a year. It could probably be a year or several months. Let us assume a referral campaign is built around a 12% discount for the referred customer, and your offering or service has the standard plan of $55.
To get everything right, the referred customer and the one making the referral have to be taken into consideration. Here is a formula used to calculate the worth of your compensation.
Finding the reward value
Referral program discount = 10% (for both referral and customer)
Basic plan price = $40
Period = 2 year (24 months)
When the variables are replaced, you will get;
24* ((0.1*40) + (0.1*40))
24* 8 = 192
A simple guide to calculating your basic return of investment
After you are done calculating the reward value, and also the lifetime worth or value of your customer, you can calculate the basic return of investment (ROI). If peradventure your ROI is higher than one, that means your referral program was positive. By playing around with your reward value, you will be able to maximize your ROI.
Also, have in mind that if the reward for your users is small, they will be less motivated to take action.
Calculating your standard ROI
ROI = (LTV – Return) / Return = ($650 - $120) = 4.4
So far, calculations have assumed that your customer's lifetime worth is the same, before or before the launch of your program. But the upside with a referral program is that each customer becomes a valuable customer, helping your business soar higher. That is because they, in turn, help you find new prospective customers.
In other to accurately access the number of potential customers your customers can pull in, you use a tool called the k-factor.
If a loyal customer spends one invite
And about 30% of those invites converts to new playing customers
Your k-factor would be 0.30 and calculated as follows,
VROI = ((LTV * (1+k)) – Return) / Return = (($650 * (1+0.30)
Calculating the average value per transaction
The average total that a client spends in one transaction is what is called Average Value Per Transaction (. This is often seen as an indicator of the behavior of the customer due to changes in merchandise strategy, season, or even pricing. Whatever factor that might spring up depends on the business sector.
To get clearer discernments from the AVT, it is recommended that you factor in both conversion and foot traffic.
A simple guide to calculating AVT
To make the most from your program, getting your figures right is very necessary. You can divide the amount of times transactions are made, on a month or annual basis. If your sales in a monthly amount to $300,000 and are accrued from 300 transactions.
300,000/300 = 1000
The median transaction value, however, is $1000 over one month.
Calculating annual transactions per customer
It will highlight the amount each customer spends during every purchase. In that case, how will you know the number of times a customer made a transaction over some time, like a year? Here is how to find out the deals per annum and customer.
From this scenario, the applicable AVT is $1000 monthly. By multiplying these figures by 12, the AVT per annum can be found easily.
$1000 x 12 = $12,000
Therefore, the yearly AVT is $12,000.
How you can calculate the retention rate
RR is merely calculated to determine the percentage of customers who never cease to patronize you, over some time, versus those who stopped.
In other words, the RR is the percent of customers who are loyal, satisfied, and keep buying and bringing referrals. Before you calculate the RR accrued to your referral campaign, consider these factors.
1. Rate of Redemption:
Most referral programs are often built on points. The more points you have, the might action you might be able to take. It is the percent of positions that are converted to benefit your referral reward.
It acts as an indication of how happy your customers are and referral success. Your redemption rate, if too low, you might have to inspect your referral program and find how operative it is. If your customers are accumulating points and yet, not using them, you might need to seek for a way to rejuvenate your program.
2. Rate of active engagement
When using this metric, use it alongside the redemption rate. To compute the actual rate, pay attention to loyal customers who have gotten some points during a specific time.
This analytic gives you a detailed insight into the particular amount of clients that are always interacting with your program. This helps you to measure your program's success.
3. Repeat Purchase Probability
This is how many customers that have made purchases more than once. Why you need to calculate your RPR is because repeat customers are those who keep you in business. When analyzed, repeat customer's impact to over 42% of your business revenue.
Not just that, they have the potential to keep interacting with your program. They are satisfied customers, loyal, and ever ready to continue doing business with you. In other to calculate your RPR, here is an example.
Calculating the repeat purchase probability
To figure this here is how to go about it. If perhaps the number of clients or customers in your business who purchased over and over again, are over 310, and the overall number of clients your company has 367, is 502, both new and old.
Reducing and removing slippages
There are several ways you can reduce slippage. Here are a few.
1. Give a balanced reward
By giving a referral reward that is too low, there won't be many advocates, and if it is also valuable, fraudsters will highjack the program. It has to be balanced.
2. Flag IP address
You will have to use a click-fraud detection service. It is for those that would want to cheat the system by making referral attempts using the same IP address. With a fraud detection service, you will be able to block such IP addresses.
3. Reward not cash base
The cash-based referral program is more likely to attract fraudsters. In that case, you have to use numerous other options, like points.
4. Reputable referral software
When looking for referral software, one feature you must look out for is its ability to block fraudulent activity.
5. Implement cookies
Lastly, you need to control the type of cookie you have on your website to prevent fraudulent activities from the same cookie session.
Calculating your ROI doesn't have to be a daunting task, now do you have to pay anyone to handle it. It is a task that you can handle on your own without having to hire an expert or professional.
To get the best from your program, you need to consider all the factors above to make the right decision. In the end, when all these are well implemented, you will no doubt see success in your program.
Didn’t know there was a way to determine the ROI, sounds really good.
I was wondering if there was a way to find the value for rewards, thanks for this.
This is a very well written article, great job!
Reading this was very insightful, I definitely learned a lot.