How to use and analysis a referral program.

During this month of Business Planning in December, we will take a look again of how to use a customer referral program and how to analysis its progress or failure. I know this will be a long post, but please bear with me.

First of course is to all ready have a referral program in place. Next if you have been using more than one type of reward or style of gaining a referral these must be segmented out.

Next you must count the number and type of responses you got from these referrals and how much you monetarily gained from each type.

Once you have this data you will be able to make predictions for the coming year and institute changes that could improve your results.

Let us take the following results as an example to be able to follow how a referral evaluation might be done.

Say company ABC PowerWash serviced 250 customers during the past year.

Of those 250, 200 where residential and 50 commercial. And of the residential 75% where repeat customers from some time in the last three years 45% in the last 12 months.

And with the 50 commercial customers half are contract customers that you see on a monthly or at least on a quarterly basis with the rest being new or only the occasional once or twice a year customer.

Of the 200 residential customers only 20 (10%) participated in any kind of referral program the entire year: an average of 5 per quarter.

10 handed out your cards and got you 16 new customers from them, with you giving your old customers a $25 credit card gift card as a thank you. Total spent in gift cards $400. Say these 16 jobs brought you an average of $800 per job with a 20% profit that would have been $2,560.00. Thus it cost you 6.4% of your profit to get this work, 2560/400= 6.4. Or 2560-400=2160/16=$135 profit per job.

Now in the next few months (90 days) if you tested out a new incentive offering half of your customers a $50 card instead of the $25. If in this case you saw an increase in the number of booked referrals from the higher card offer you would be able to see if the amount of increased business was worth the expense.

For example you offer the next 20 customers (10 of each offer amount): 2 customers got you jobs at the old $25 rate but 5 customers (1/2 of those offered) got you jobs at the higher $50 per rate. Leaving the average job cost and profit the same let us look at the numbers.

2 x $800 = $1,600 x .20 = $320-$50= left you $270/2 or $135 per job for your profit.  The same 6.4% cost of return that you had this past year with this same offer. Now let us look at the referrals offered at the higher card amount.

5 x $800 = $4,000 x .20 = $800 / $250 card cost = or 3.2%. You might think that was better but look at the total profit per job, 800-250=550/5=$110 profit per job after paying out the cards. But did you lose in the long run? If you go with the set amount that only 2 out of every 10 customers will take the $25 card and give you a referral, that means you will miss the other 3 at the $110 profit for each.

You need to figure out if those potential three new customers a quarter that will cost you the extra $25 per job in profit at the initial job is worth it to you. Could be if you have lots of open time and you need that $330 cash flow for your family. Plus if they become a returning customer or better yet become a free word of mouth referer. So you increased the number of old customers that participated from 20% to 50% but did slightly reduced your profit per job from the year before for these initial jobs with the higher offer.

Now let us look at the other 10 residential referrals from last year that you had. 6 had given you names of a friend or family member that booked a job because you offered them a free service on their next years business (they had turned down the $25 card offer prior to your $100 offer), that was to say, you offered them what you would have normally charged a customer $100 for (but costs you $40 to provide) to be free at their next visit.

Again let us use the same average price and profit for these jobs. So 6 jobs x $800 =  $4,800 x .20 = $960 / $240 (the actual cost to you) = 25% of the cost came out of your profit. This looks like a much larger cut out of your profit, but look at the profit per job, 960-240=720/6= $120 profit per job. It is actually better than the $50 gift card, since the out of pocket expense is $10 different, $40 vs. $50. While you might think giving away free services wouldn’t be smart you can see it could be better on the bottom line by bringing you more work. But since they had already turned down your $25 card offer for the free service is this offer of free service something you want to keep? No real way to tell.

So as stated earlier for the next three months you offer half your customers the $25 card and the other half $50 gift card and don’t make the $100 free service available at all and you still got the 5 new customers. Since you have no idea how many of these 5 (or more) you would have gotten if you had kept the $100 value offer you will just have to use the ROI of $110 per job as the result. Your next 3 month test may have to be the $50 card vs. the $100 free service offer.

Now to the last 4 referrals from the previous year. These where from customers that you had not given any incentive too (maybe you had already given them a great deal, or the job was very small and you did not want to invest any more of your profit into them) but because of your work they had referred new customers to you any way, six in fact. So the cost of a referral program was nothing, and profited you $960, but these customers consisted of less than 2% of your total client base, which is the national average of unsolicited word of mouth referrals.

Now to the commercial jobs. Of the 50 as stated above 25 are contract customers that get special pricing and you gained only two new customers as direct word of mouth referrals from them. Both were non incentive referrals since there was no incentive referral program in place for the commercial customers. So the profit you gained from these new customers was say $3,000 total for the year. Of the other 25, 12 where occasional customers which brought you no referrals and next 11 where new ones you had spent time finding, visiting and getting yourself at a cost of over 50 man hours during the year. The final two were the new referrals your contract customers brought you equaling your 50 total commercial customers for the year.

So let us say you are thinking about expanding your referral program in to your commercial side to see what could be the benefit. You also choose to try the $50 gift card as your incentive. In the next three months this was your result: of 12 customers offered, you got 2 new referrals, one being a new contract customer and the other will probably only be an occasional once or twice a year job. Already you have gained the same number of new referrals that you got in total the previous year. If the one contract customer will give you a profit of $200 per month and the occasional job bring you and estimated $550 of profit for the year you gained 12 x 200 =  $2,400 + $550 = $2,950 / $100 (gift cards) 2.9%, or 2950-100=2850/13 (jobs)= $219.23 average profit per job. And since the previous year you only got the two new contract customers by the free word of mouth method you can look at the $3,000 they brought vs. the estimated if the trend holds of 2 new customers a quarter to bring in around $6,600 over they year. 12 + 9 + 6 + 3= estimate of 30 jobs x $220 average profit = $6,600 estimate. This could be over twice the amount you received with no referral plan in place. It could be more or less depending on when they come on board and if they are monthly or only an occasional customer. And if you can handle the increase in your work load.

I hope these examples has you looking over your referral plan and running tests to see what profit increases and improved cash flow you can make this next year in your business. Happy New Year.