Why A Referral Program is the Quickest Way to Boost Your NPS

October 12, 2017
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There are two things we love analyzing and discussing here on the Smile.io blog: customer metrics and rewards programs. Over the years we’ve created a huge arsenal of posts that discuss the many features of the best rewards programs on the market and our how-to guides on calculating the metrics you need to know to stay on top of customer trends. 

More often than not, our two favourite topics intersect in very compelling ways because the rewards programs we choose to study frequently share a significant relationship with the customer metrics we love to calculate. In the past, we’ve discussed powerful examples of this at work, such as how a referral program can contribute to lower customer acquisition costs and how a points program often increases repeat purchase rate

However, today we’re here to examine a more external metric. Today, we’re going to break down the interesting relationship between a brand’s referral program and their net promoter score (NPS for short).

Everything You Need to Know About Your Net Promoter Score

Before we get into how a referral program can impact a brand’s net promoter score, it would probably help to do a quick review of what exactly NPS is. We’ve already written a complete guide on how to calculate and improve your net promoter score, so we’ll keep this review brief.

Simply put, NPS is a single value that helps you figure out how likely customers are to recommend your brand to other people. Unlike other metrics like customer churn rate or average order value, NPS isn’t based on hard actions like churning or purchases.  Instead, NPS is calculated  based on intention or likelihood. In this way, a brand’s net promoter score is able to approximate the sentiment or feeling around a brand even before customers start acting on those feelings.

Net Promoter Score Scale

The NPS calculation is a rather simple one. A brand simply surveys its customer base and asks how likely (on a scale of 1-10) they would be to recommend the brand to others. Once the results are gathered, they sort customers into promoters, passives, and detractors. Using the scale above, they can then subtract the fraction of detractors from the fraction of promoters to arrive at a “net” score, as shown in the equation below.

Net Promoter Score (NPS) Calculation

A net promoter score is a fantastic metric to keep handy because it is a valuable leading indicator for many other important customer behaviors. A falling NPS, for example,  often indicates a period of high churn on the horizon while a rising NPS is usually indicative of growing sales and customer satisfaction.

 

Everything You Need to Know About Referral Programs

Now that we’ve covered the basics of the net promoter score, let’s make sure we’re all on the same page when it comes to the other half of the referrals-NPS relationship: referral programs.

Referral programs are one of the most prolific and powerful rewards programs a brand can run. The mechanics are extremely simple: brands offer shoppers a reward for successfully referring a new customer back to the brand. These rewards can be anything from increased usage of the product to discounts for future purchases, and are determined based on what the brand feels their customers would appreciate. Additionally, a successful referral might have varying definitions - some brands might be after a download or site visit, while others might be looking for an actual purchase.

Referral programs are a classic acquisition strategy
A referral program helps brands turn their best customers into an acquisition army.

Referral programs are one of the best contemporary strategies for building a better business model.  By creatively crowdsourcing some of your sales and marketing efforts, they allow you to turn your best customers into an acquisition army.

 

So, How Do Referral Programs Impact Net Promoter Scores?

Looking at the definitions for both referral programs and the NPS calculation, you’re probably already starting to connect the dots.  However, the relationship here is a powerful one and definitely worth stating explicitly. Let’s take a look at the two key reasons referral programs are practically built for boosting net promoter scores.

1. A Referral Program Creates Incentives For Promoters

When I’ve studied referral programs in the past, one of the most jarring statistics I’ve come across is that while 83% of satisfied customers are willing to refer a product or service, only 29% actually do. This stat is the perfect illustration of one of  the biggest problems in the larger world of ecommerce: friction.

Most lost opportunities in ecommerce are because of customer friction
While 83% of customers are willing to refer a brand to their friends, only 29% actually do.

Customers will almost always take the path of least resistance unless there’s something in it for them. This behavior is something we see time and time again: a customer might be willing and able to make repeat purchases, but often waits for offers like reward points to sweeten the deal and push them over the purchase line. Customers are frequently ready to make a big purchase, but then choose the brand where that purchase bumps them into a higher VIP tier. Most importantly, in the statistic above, 4 out of 5 satisfied customers identify that they are willing to recommend a product to a friend, but less than a third of them actually do!

A referral program takes the friction out of the referral process and turns those potential recommendations into actual, tangible, word of mouth marketing about your brand. Your customers are willing to put your name out there - you just have to ask them!

Customers are willing to promote a brand if you ask them
A referral program takes the friction out of the referral process. Your customers are willing to promote your brand, you just have to ask them! 

If it sounds simple, that’s because it is! When you run a referral program, your customers stand to gain more from promoting your brand to the people in their lives and that will increase the number of customers that fall into the “promoters” category. When the number of promoters goes up, your net promoter score does too, making it an open and shut case!

2. A Referral Program Creates More Value for All of Your Customers

A referral program isn’t just an acquisition tool for getting new customers in the door - it’s a pretty valuable retention and satisfaction tool, as well. Like any other product or service, a rewards program grows in value  the more ways customers are able to interact with it.  This is why providing a referral program creates a better overall brand experience for your customers.

"The law of diminishing marginal utility states that as a person increases consumption of a product or service, there is a decline in the enjoyment that they get from each adittional unit of consumption."
www.investopedia.com 

We’ve discussed the law of diminishing marginal utility in the past, explaining that customers will find more value in a rewards program that offers diverse rewards.  However, that law also applies to the earning side, as well. When a brand offers diverse ways for customers to earn rewards, customers end up more engaged and more satisfied with the program because choice makes experiences feel personal. This is why we frequently recommend rewards for social sharing, purchases, reviews, and -you guessed it - referrals.

Adding referrals to your earning model allows your customers to pull more value from both your rewards program and your larger brand. This additional value can be the difference that helps convert some of your detractors to passives and your passives to promoters, which would naturally boost your NPS.

Newly referred customers have an extremely high CLV
A referred customer's lifetime value is between 16-25% higher than that of an average customer. 

I know what you’re thinking - “that’s great for my existing customers, but what about my newly referred customers?” Well, studies actually show that a referred customer’s lifetime value is between 16-25% higher than that of an average customer.

That’s right, these new customers are some of the most engaged and valuable customers, spending more time and more money with your brand than other groups. If these characteristics sound familiar, they should! These newly referred customers share many similarities with your best promoters, creating a virtuous cycle of new customers who become great customers who refer new customers who become great customers… and on and on and on!

 

Spread the Word: A Great Referral Program is the Quickest Way to Boost NPS

At the end of the day there are many ways to improve your net promoter score, but there may be none as immediate and impactful as a solid referral program. Referral programs give customers the outlet they need to become the promoters they already want to be by removing friction from the recommendation process.

Additionally, a well-structured referral program creates value for both your existing customers and new customers, helping to increase your customer satisfaction and the likelihood that these customers will talk about your brand. So let’s settle the (net promoter) score once and for all: referral programs and NPS are a match made in heaven.