Making a Referral Program Work For You

There’s no arguing it. Bringing new customers in through the door is a key component in meeting your sales goals. Another key component is to do so in a way that doesn’t wreck your bottom line. After all, advertising costs are one of the biggest revenue drains for any business. Choosing the right way to get the word out can make all the difference.

When we look at the cost of acquiring new customers, it is affected by several variables. Basically, it’s the cost associated with the time and resources it takes to convince a customer to buy. This includes the cost of the product, research and marketing, all of which can be expensive.

To determine your shop’s customer acquisition cost, simply divide the amount spent to attract new customers by the number of new customers. Doing so requires differentiating between new and existing customers, which admittedly is a sticking point for many operating systems. Putting calculations aside, you intuitively understand which methods are more cost effective. With that said, no one can argue that the most cost effective way to bring in a new customer is through past customers. And this is where a referral program comes in.

A survey conducted over a three-year period showed how using past clients as ambassadors pays off. Those independent flooring stores with a referral program experienced:

  • $74,340 more sales per RSA
  • 2 point increase in gross profit
  • 61% increase in net income
  • $308 higher average ticket
  • $32,925 more in owner wages

Like I said, there’s no arguing the benefits of a customer referral program. But how do you implement it? The good news is, it doesn’t have to be difficult. While offering a referral check or gift certificate may seem like a great idea, it can actually be a bit cumbersome to manage and is not all that successful. In addition, I’ve seen many studies which indicate customers are uncomfortable profiting from the purchases of friends. This doesn’t mean you shouldn’t reward referring customers, but let’s do it in a beneficial way that makes everybody happy.

Here’s what I recommend. When a referred customer makes a purchase, reward him with $100 off for every $1000 spent, and reward the referring customer with $10 in store credit for every $1000 spent. I like to give my customers the option of donating this credit to charity, to alleviate any discomfort he or she may feel from benefitting off their friend’s purchase.

The next step is to make it easy to implement. At the time of closing, simply provide customers a simple way to make referrals. This can be a physical referral card presented at the time of closing or mailed with their warranty information, or it can be a digital version to be filled out online. Credits can be easily tracked in systems such as RFMS, Pacific Solutions, Rollmaster, QFloors or Quickbooks.

So, who’s ready to talk real dollars? Glad you asked! Using traditional direct mail efforts, let’s say you spent $5000 on a sales event campaign that brings in 40 new customers who spend $100,000 total. If these customers receive 10% off their purchases this would equate to a customer acquisition cost of $125. Pretty steep.

Now, let’s argue the other side of the coin. Compare the above example to a referral program in which 20 referral cards are distributed to a customer at the cost of $0.60 to cover printing and mailing. If these cards yield just one new customer, then your customer acquisition cost is a mere sixty cents. Do this electronically, and the costs go down even further.

It’s clear that a referral program can work for your business by bringing in new customers, earning substantial revenue and greatly enhancing your customer relations.

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