Last Updated: December 2023
How do you know whether your referral program is performing as expected? By benchmarking it against other programs in your niche. Many metrics can help you get a clear picture. However, referral rate is the ultimate measure of the successful performance of your referral program. It is the percentage of referred sales out of the total sales volumes for a given period.
Sound simple? However, there is a catch.
A referral rate by itself means nothing. To know whether you are in the red or green, you need to know your niche/industry’s average referral rate. As you might expect, referral rates vary widely across sectors and product niches. So it does take a bit of research and analysis to understand whether you have a good referral rate.
To determine the average referral rate for your industry or niche, you will need to track it for a minimum of 6 months. The average referral rate over six months is likely to be stable. However, you may be surprised to know that the referral rates in most industries are in the single digits (usually between 2-3%) and do not change much over time. For example, online brands report an average referral rate of around 2.33%, according to Review42.com.
It is safe to assume a conversion rate of 1 sale per 50 referrals. Even if you have a popular product and great service, the most you can hope for is around 3-4%.
But don’t be disappointed just yet! Given that the average revenue from ecommerce referrals is $155,000 per year, you could still hit some of your business goals with your referral program. In fact, some brands have managed to outperform their competitors consistently. However, it is crucial to learn about the many variables that influence the ROI of your referral program.
Vital Factors Affecting the Referral Rate of Your Referral Program
1. Level of customer satisfaction:
Your NPS score can be a good indicator of your referral rate. Satisfied customers are more likely to share your referral offer with their friends. Other indicators include the number of social media mentions and online reviews. This is because a person that receives a referral link from his/her friend is more than likely to research your brand online. Positive reviews and social media tags work in your favor and increase the odds of conversion for your referral program.
2. Level of brand engagement:
A great customer experience will bring word-of-mouth publicity to your brand. Over a while, engaged customers will naturally advocate for your brand with their friends and family even if there were no rewards for them. This basically shows you deliver a personalized experience for your customers and deliver quickly on your promises. If so, your referral rate is likely to be high.
3. Referral conversion rate:
It is great to have satisfied and engaged customers, but your referral rate is determined by the number of referrals that convert. This is where factors like user-friendly landing page design, crisp and explicit content, and on-page live chat can make a big difference.
Key referral rate characteristics that you should be aware of:
Regardless of the niche/industry you’re in, the average referral rate is 2.3%. If you invest in optimizing your product and delivering a quality customer experience, you can expect an increase of no more than 2%. For e-commerce brands, this is a good benchmark to measure referral program performance. If you are currently getting below-average results from your referral program, consider investing in referral software that can help you streamline referral tracking and management.
Electronics brands have a much higher rate of referral
Gadgets and electronics enjoy by far the highest referral conversions. According to a popular study, this is primarily because of thriving tech/gadget review communities with customers sharing tips and recommendations with millions of their peers. In fact, tech brands sell up to 60% more by way of referrals than brands in other industries.
The key takeaway for brands in other industries is this: building an online community can boost sales and lower the cost of marketing.
Customers looking for a product recommendation can get useful tips and advice from fellow community members which can open up new up-sell and cross-sell opportunities.
Exceptional cases do exist.
Some brands defy all logic when it comes to their incredibly high referral rates. This may be the outcome of several factors. According to ReferralCandy, referrals account for 7.5% of all sales for some brands. However, it is unrealistic to expect that the majority of e-commerce sales could come through referrals.
Limitations to be aware of:
1. Referral program performance is variable:
As with all things ecommerce, the performance of your referral program will inevitably vary over time. While 2% growth is the average, this figure is based on data for a limited number of brands. So, actual performance is subject to change and cannot be predicted with any certainty.
2. A good referral rate is not an end in itself:
If you have an above-average referral rate, it is certainly something to be proud of. However, it could be because other marketing channels such as email, social media, search, or paid ads are underperforming in terms of conversions. Thus, it is critical to avoid placing all your bets on one channel and develop a balanced marketing strategy for higher ROI.
It is possible to grow your referral rate over time by personalizing your customer experience, as discussed above. To make this possible, your customer support team has a key role to play. If your best advisors are currently spending more time on routine tickets, that’s an opportunity cost for you. Their talents could be utilized much better in handling more important issues while up-selling referrals. By partnering with Helplama, you can optimize volumes and improve the availability of your in-house team. Our plans are flexible and can be adapted for any budget or industry.
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