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Why Every Growth-Focused SaaS Needs a Referral Marketing Program

Rewardful Team

It’s hard to find sustainable ways to grow a SaaS, especially these days. There are countless growth strategies, tactics and tools to experiment with.

It’s a myth that SaaS growth is complex. You don’t need a dozen marketing systems working in sync to drive growth. You just need one distribution channel that works well.

PayPal founder and early Facebook investor Peter Thiel says it well:

“[You] probably won’t have a bunch of equally good distribution strategies. […] It is very likely that one channel is optimal. Most businesses actually get zero distribution channels to work. Poor distribution — not product — is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished. So it’s worth thinking really hard about finding the single best distribution channel.”

That isn’t to say you should only use one marketing channel. By all means – experiment with new approaches.

But it’s smart to build a strategy around a marketing channel that’s proven to work; one that’s grown countless startups because it’s based on a timeless, well-known principal.

In this article, we’ll explain why your SaaS needs a referral marketing program.

What is Referral Marketing?

Referral marketing is one of the simplest and most effective ways to acquire and retain new customers. It relies on the time-tested technique of word-of-mouth.

When one person refers your product to another, the referred party is 4x more likely to buy. Overall, word-of-mouth improves marketing effectiveness by 54%.

Here’s how a referral program works:

You give your existing customers a special link to share with their friends. When their friends sign up for your SaaS via that link, the customer gets credit for the referral.  This reward can take the form of credits in your app, extended features or usage, or a free month.

Referral programs typically offer an incentive for the existing customer and the new customer.  This is referred to as a Double-Sided reward, and this the most powerful incentive you can give to referrers.

Dropbox is one of the most powerful examples of a successful referral program.

In 2008, Dropbox began a referral program that rewarded existing customers with extra free space. The customer could accumulate 500 MB of storage space for every customer they referred up to 16 GB.

Over the next 15 months, Dropbox climbed from 100,000 to 4 million subscribers. That means they doubled their users every three months.

The beauty of their referral program is that it allowed them to bypass their ad spend. Before the program, they were spending $233-$388 per customers… for a $99/year product. They had to keep a customer for three years before they made any money at all.

If they had continued to rely on paid ads, they would have failed. By leveraging referral marketing, they saved their ad spend and poured that money into product development.

Referral programs aren’t limited to large, well-funded companies. You can create one for your SaaS, regardless of the size or age of your business.

When Influitive and Heinz researched referral programs, they uncovered several encouraging statistics:

  • 70% of companies with referral programs were on pace to meet or exceed their revenue goals.
  • More than half of companies with referral programs rate their sales efforts as “highly effective,” compared to only 35% without referral programs.
  • 51% of companies with referral programs say their effectiveness at maintaining sales pipelines is “very effective” compared to just 32% of those without referral programs.

Obviously there’s a distinct advantage to having a referral program.

Let’s talk about the reasons every SaaS should begin a referral marketing program.

1. Lower Customer Acquisition Cost

There are countless ways to acquire new customers, but each come at a cost.

Your customer acquisition cost (CAC) is a figure that calculates everything you spend to capture, convert, and onboard new customers. It includes all the cash you put out just to bring someone new into your SaaS.

CAC is a critical metric to track, yet many SaaS businesses never bother. If you fail to track and control your CAC, you might lose money for every customer you acquire.

Obviously that’s a recipe for disaster, so you should work to minimize your CAC as much as possible.

Your CAC depends largely on the tactics and tools you use to acquire new customers. If marketing channel A produces just as many customers as marketing channel B, but for half the cost, it’s smarter to abandon channel B and invest more in channel A.

Unlike most marketing channels, referral marketing offers an extraordinarily low customer acquisition cost because it relies on your customers to spread the word. Most importantly, this cost is fixed and predictable. Your only costs are the offer (whatever you give away to the referrer and referee) and the cost of the tool to run the program.

Referral marketing gives you a clear picture of what it costs to acquire a customer, unlike more nebulous marketing channels like content marketing, email marketing, influencer marketing, etc.

2. Healthier Customer Lifetime Value

Your customer lifetime value (CLV) is a prediction of your net profit from the entire relationship with your customer. Basically, it shows you how much money you’ll make off each customer.

To drive growth and profitability, your CLV must be higher than your customer acquisition cost. The bigger the difference between your CLV and CAC, the faster you can grow.

A study by the Wharton School of Business learned that referred customers are more valuable than non-referred customers. The CLV of a referred customer is 16% higher than non-referred customers due to higher profit margins and reduced churn.

The study tracked 5,000 customers acquired through a company’s referral program. After 33 months, they compared the referred customers to a similarly sized sample of customers acquired through other channels during the same time period.

The study teaches two important lessons:

  1. Referred customers are 25% more profitable. The study’s researchers suspect this is because the referred customers were a better fit. Customers only select people to refer if they think this is a good match. This is essentially built in lead qualification!
  2. Referred customers are 18% less likely to leave. The probability of remaining a customer over the study’s duration was 82% for referred customers, as opposed to 79.2% for non-referred customers.  Know any SaaS owners who would like to reduce their churn by 18%?

As you can see, referral marketing programs don’t just bring in more customers – they bring in better customers who spend more money.

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3. Better Lead Quality and Quantity

Generating leads is a critical part of any SaaS marketing strategy.

There are a lot of ways to do that, but most methods are expensive, hard to measure, and prone to generating unqualified leads.

What’s an unqualified lead? It’s someone who isn’t in a position to buy your product. Often this means they don’t have the problem you solve or aren’t willing to pay for a solution.

Unqualified leads don’t add any value to your business. If your SaaS is a higher-touch product that requires a salesperson to reach out, unqualified leads can waste your time and money.

Qualified leads are your money-makers, but they aren’t easy to come by. According to the BrightTALK Lead Generation Report 2015, 61% of marketers say generating high-quality leads is problematic. Survey respondents say it’s the most common challenges marketers face.

Referral marketing is one of the best tools to generate high-quality leads because your customers are likely to refer your product to people like them.

They won’t refer you to their mother-in-law who barely knows how to use a computer. They’ll refer you to their colleague at another company who deals with the same problem.

This means the leads that come in through referrals are already pre-qualified from your customers. A survey by Software Advice found that 78% of B2B marketers say referrals generate good or excellent quality leads and 60% say referrals generate a high volume of leads.

4. Higher Conversion Rate

Driving traffic to your website isn’t enough. You also have to convert your visitors into paying customers. Arguably, that’s a harder task, so you need all the help you can get.

Referral marketing generates conversion rates 3-5x higher than any other marketing channel.

When visitors land on your website at the behest of a recommendation, they’re more likely to subscribe to your product. According to a Nielsen study, 92% of respondents said they trusted product referrals from their friends or family.

Why? Because they already see value in your product, at least subconsciously. They know your product’s function, they know it solves the problem it claims to solve, and they know at least one person who enjoys its benefits.

Furthermore, non-referred visitors are hard to convert into customers because they were never right to begin with. They found your content or clicked your paid ads, but they may not have the problem you solve, can’t afford your service, or they’re happily using some other solution.

Like we said above, referred traffic is pre-qualified by your customers. They share your referral offer with their friends and colleagues who find it valuable. They won’t refer people who have no interest in your product or don’t experience the problem you solve.

Referral Marketing and the Future

Andrew Chen (angel investor and head of growth at Uber) recommends referral programs because they’ll always work.

“The behaviors that cause people to do this are the same as what existed in the past – there’s a personal incentive for the sender, but also an incentive for the recipient,” he says.

To grow a successful SaaS business, you have to acquire qualified leads as cheaply as possible, convert them into customers, and prevent them from churning. Referral marketing (and the power of word-of-mouth) can help you with all of this.

The sooner you start with your referral marketing program, the sooner you’ll grow your customer base and fuel more growth.

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