Table of Contents
- What is Customer Acquisition Cost?
- How to Calculate CAC?
- Making Use of Referral Programs to Reduce CAC
- 6 Reasons Why Referral Marketing is Best to Reduce CAC
- How companies like PayPal, Tesla and Dropbox Reduced their CAC Using Referral Program?
We decided to burst out the myth that marketing and spending go hand-in-hand. Referral marketing is low cost, boosts your social media visibility, and is a great revenue generator. Too often CEO’s and business heads overlook referral marketing channels. To lower the customer acquisition costs, marketers often focus on changing the marketing spend to generate more leads.
Businesses need not overlook referrals because they generate leads with minimal or no increase in budget. Moreover, referral marketing is beneficial because it allows businesses to reduce customer acquisition costs.
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is the total cost incurred by a company to acquire a new customer. It includes all marketing and sales expenses related to bringing in and converting a prospect into a paying customer. Businesses can minimize their overall CAC, optimize their spending, and make informed decisions on their marketing strategies by understanding and evaluating CAC.
How to Calculate CAC?
Calculating CAC involves dividing the total marketing and sales expenses by the number of new customers acquired over a specific period. The formula for CAC is as follows:
CAC = Total Marketing and Sales Expenses / Number of New Customers Acquired
Let’s take an example of a company that spent $10,000 on marketing and sales efforts in a month and acquired 50 new customers during that period. The CAC would be:
CAC = $10,000 / 50 = $200
This means that the company spent an average of $200 to acquire each new customer.
Making Use of Referral Programs to Reduce CAC
Businesses have to understand CAC in order to maximize their marketing efforts and make data-driven choices.
Referral programs can be an effective strategy for reducing CAC. Businesses can obtain new consumers at a lower cost by utilizing current customers to refer friends, family, or coworkers to the business. Referral programs increase the likelihood that referred customers will become paying customers by using the social influence and trust that current customers hold. Businesses can minimize their customer acquisition cost (CAC) by rewarding customers for successful referrals. This encourages consumers to actively promote the products or services they offer.
According to the US Small Business Administration, businesses need to spend 7-8% of their revenue on paid ads to gain customers.
However, Dropbox and PayPal barely spent on paid ads. But they managed to grow exponentially considering the fact that Dropbox grew 1300% in just 15 months. The reason for their growth is that they have successfully cut down CAC using referral programs.
Customer Acquisition Cost for paid ads is 23% higher than referral programs which is why companies like Dropbox and PayPal invested in referral programs that helped them reduce CAC by 15%.
Referral Rocket can help you reduce CAC by 10-15% by allowing you to create effective referral and affiliate programs where you can launch campaigns for businesses in just five steps.
6 Reasons Why Referral Marketing is Best to Reduce CAC
Referred Customers Generate Higher Revenue & ROI
Referral marketing brings in qualified prospects who are more likely to become customers, allowing businesses to see revenue growth for a longer duration. Referral campaigns statistically increased revenue growth for businesses by 86% over two years.
Wharton Business School study revealed that referred customers were, on average, $0.45 more profitable per day than non-referred consumers. Furthermore, these customers had a $23.12 lower customer acquisition cost (CAC) than non-referred customers. Customers who have been referred have a 60% higher return on investment (ROI) when the initial reward is taken into account over a six-year period. Overall ROI from a referral program is 10x for enterprise companies.
Curious how much ROI your referral program will generate? We have created a detailed document explaining how you can calculate ROI for you program. You can access the Referral Program ROI document here. We also built an online referral program ROI calculator where you can plug in values about your business and generate the ROI for your referral program.
Referred Clients have Longer LTV
Rewarding your current customers for referrals drives new revenue. Referred customers are more likely to make a purchase and have a higher average order value than consumers obtained through other marketing strategies.
Let’s look at some stats:
- Referred customers are 54% more likely to make another purchase.
- Referred customers have 34% higher average order value than other customers.
- Referred customers are 4 times more likely to buy.
- You can see a 25% increase in spend when it comes to referred customers.
This shows that referred customers are more likely to make repeated purchases and therefore have at a 16% higher lifetime value (LTV) than non-referred ones.
Referral Marketing is Cost-Effective
Referral marketing helps businesses acquire higher-quality customers at a lower cost. Unlike conventional marketing channels, referral marketing drives down customer acquisition costs because it makes use of your current customers who help spread the word, which is a crucial strategy for enhancing profitability.
For instance, the average cost per action on Facebook is little more than $18. This has only gotten higher over time and will keep getting higher as the social media advertising industry gets more power. Companies can drive down customer acquisition costs by leveraging current users and rewarding them to refer others and the best part is they don’t have to invest in highly competitive and expensive paid ads on Google and social media.
Referred Customers Show More Engagement
According to a study by Wharton Business School, Customers who received a reward had lower turnover than customers who did not receive a reward. The retention rate of consumers who were referred was 18% greater than that of customers who were not referred (and it did not decline with time).
Referred consumers has 82% chance of continuing to be actively involved even after 33 months.
It was also discovered that friends who had been referred to a brand showed a far more dedication to it in a shorter amount of time. Referred customers show more loyalty and engagement than non-referred ones towards brands according to a survey conducted by State of Referral Marketing.
Referral Marketing Increases Trust
Consumer behaviour has changed in the digital age, with an increased focus on pre-purchase research. Customers are more price conscious and are reading reviews and price comparison websites.
The beauty of referral marketing is that consumers get to hear about your brand from someone they know personally. It is not like traditional marketing where companies monotonously promote products through ads or any other mediums. In fact, 90% of people trust referrals more than any form of advertising.
Thus, referral marketing plays a crucial role in building trust which is one of the most important and crucial factors that influences user purchase decisions.
Referral Marketing Boosts Social Media Visibility
You might wonder how social media can help you reduce CAC. Considering the fact that nearly 64% of people trust brands that have an active and positive social media engagement it has become a necessity for companies to have social media presence – thanks to referral marketing, it can increase the brand visibility cutting down the money you would require to invest in running social media ads or any other investments you would require to do boost social media visibility.
Referral marketing is a good social media-friendly channel. Referral programs usually include social media sharing buttons, which make it simple for your community of customers to push a refer-a-friend campaign to their more extensive networks.
We hope these six reasons convince you to look at referral marketing as a brilliant customer-acquisition strategy but the real question is how do you get customers to participate in referral programs and make repeated efforts to bring down your CAC.
This is when referral software comes to rescue.
Integration
A well-designed referral software like Referral Rocket integrates seamlessly with CRM tool, ESP solution and POS software.
It makes it simple to connect to your API, gamify referral programs to increase referral customers, and get insightful insights from other platforms.
Customer Engagement
We just discussed that customer engagement plays a huge role in attracting repeated purchases. And that’s exactly what a referral software does, you can have dashboards where customers can keep coming back to see the information about rewards and bonus points they earned. When customers have a smooth experience, they show enthusiasm to refer multiple people and encourage their friends to make purchases.
Advanced Analytics
You don’t need third part applications or marketing expertise to study customer behavior because analytics give you all the information about customers so you can modify strategies accordingly. By eliminating the guesswork, you can mitigate the investment needed to develop new strategies regularly, thus reducing the CAC significantly.
How companies like PayPal, Tesla and Dropbox Reduced their CAC Using Referral Program?
PayPal
PayPal’s success story is often attributed to its early adoption of referral programs. In the highly competitive online payment industry, PayPal was able to swiftly establish itself by providing cash rewards to both the referrer and the friend they suggested. A case study from The Wharton School claims that by using PayPal’s referral program, they were able to bring on 7–10% of new customers, which decreased their customer acquisition cost by 10%. This shows the effectiveness of referral programs in boosting the acquisition of new consumers and cutting down on marketing costs.
Tesla
Referral programs have shown their significance even in the automotive industry. Tesla’s referral program has been crucial in boosting customer acquisition. It provides rewards like free use to superchargers and discounts on new cars. As to the Q2 2019 data from Tesla, over 30% of their new car sales during that time came via their referral program. This shows how referral solutions, even in traditionally non-digital industries, may have a major influence on lowering CAC.
Dropbox
Dropbox is among the most well-known companies with a successful referral program. Dropbox was able to drastically lower their customer acquisition costs (CAC) by providing more storage space to both the referrer and the person they referred. As per a Harvard Business School case study, Dropbox was able to generate an extra revenue of approximately $48 for every customer who was referred. This enhanced their overall customer lifetime value in addition to helping them acquire new customers at a reduced cost.
(Note: To design super-effective referral programs like Dropbox, PayPal and Tesla, try Referral Rocket for free today)
To sum up, referral programs are a powerful tool for companies trying to minimize their CAC expenses. Through the utilization of customer referrals, businesses can increase brand advocacy and customer loyalty while accessing a relatively cost-effective and efficient source of new customers. The examples discussed here highlight the success stories of various companies that have successfully utilized referral programs to drive growth and cut marketing costs. So, if you’re looking to minimize your CAC costs and boost your customer base, it’s time to harness the potential of referral programs and unleash their benefits for your business.
