Every SaaS business hits a plateau in terms of revenue growth at one point or another. Most early stage SaaS startups peak and start flatlining when they are just beginning to gain momentum in terms of revenue—typically around the $1m–$3m ARR mark.
This is the time when you want to streamline your inbound and outbound demand generation efforts. Also, at the same time, you want to bring down your customer acquisition cost(CAC) and increase your average deal size. And that’s where customer advocacy comes in—predominantly in the form of referrals.
But the key question is—what’s the right time to build a referral program?
Ideally, it makes sense to look at referrals as a serious option once you have achieved your initial product market fit. For instance, once we at Avoma established our initial product market fit (product-market fit is always a continuous work in progress), we started to notice that 20-30% of our customers were coming in through referrals. As part of our sales conversations, we have the habit of asking our prospects about how they discovered us, and we started to consistently hear that one of our existing customers referred us to them.
As referrals started becoming a serious channel, we didn’t know how to track it. Also, we wanted to figure out a way to thank our customers who were referring us, purely out of goodwill. And that’s when our search for building a referral program began.
Through this post—I’ll try to lay out our journey of how we built our referral program at Avoma, the platforms we considered, and our learnings along the way.
But first, let’s establish a common ground on what a referral program is and why you need it.
What is a referral program?
A referral program is a formalized system to encourage your existing customers to advocate your brand or product. Think of the referral program as an extension to online reviews or feedback surveys—where a customer personally shares their brand experience with someone in their network (partner, industry peers, etc.)
In a typical SaaS setup, it’s about creating a system to expand your customer base by encouraging your existing customers to share your story with others, and rewarding them every time they bring in a new customer to you. The key advantage of a referral program is—you can be confident of the quality of new lead generation through the channel.
However, there are more advantages:
Low Customer Acquisition Cost (CAC)
One of the biggest advantages of building a referral program is you increase the influx of new customers without having to spend a lot on marketing campaigns. Your customer acquisition cost through this channel will boil down to the rewards you set up—which could be anything from $$ to platform-fee discounts.
High conversion rate
The conversion rate from referrals are usually 3-5x higher compared to other customer acquisition channels. The average conversion rate across channels is about 2.3%, whereas the conversion rate from referrals specifically in B2B SaaS is 30% higher than other channels. But the interesting part is that only 11% of SaaS marketers or AEs ask for a referral. It’s time we take referrals more seriously.
Increased brand awareness
Brand awareness isn’t the easiest to measure—but it’s quite intuitive that the more referrals you get, the more popular your brand becomes. Improved brand awareness naturally contributes to reducing your CAC because more prospects find your product organically.
Higher retention and LTV
Two of the most key success metrics in SaaS are your customer payback period and their lifetime value (LTV). The longer a customer stays with you, the chances of account expansion are higher, which in turn means accelerated payback period and higher LTV. And through experience, we’ve seen that B2B referrals tend to have ~40% higher retention rates compared to any other channel.
Building a referral program step-by-step: Avoma case study
Now that we’ve covered the basics of what a referral program looks like and why you should build one, let’s now look at how to build a referral program. And more specifically, how we at Avoma went about it.
1. Analyze how referrals are coming in currently
The right time to build a referral program is when you already have referrals coming in. It shows that your customers like your product and are willing to be advocates regardless of a reward. With that context, while you begin to build your customer referral system, a good place to start is analyzing the current referral journey. It’s crucial to understand how referrals are currently coming into your ecosystem.
If you know how the referral leads are coming into your system right now, you'll know what to fix. And then you can now start designing a flow for tracking referrals, onboarding the referred customers, calculating referral rewards, etc. But all that will make more sense once you establish clear goals for the customer referral program.
2. Set clear business goals for your referral program
The success of a referral program will purely be based on the clarity of the goals you want to achieve with the program. You need to have a strong understanding of factors such as:
- Where do you stand in terms of product-market fit?
- How does your current customer churn looks like?
- Should your referral plan be only focused on growth?
- Should your referral program have a retention goal?
For us at Avoma, it was very clear that we had high customer satisfaction and retention. In fact, several of our existing customers were already referring Avoma to their network and bringing in new customers. It was obvious that we needed to have a system in place to easily allow our customers to make referrals.
So, our immediate next step was to have specific business goals.
We kept it simple and clear—we wanted 15% of our net new revenue to come via referrals.
Once you achieve goal clarity, the next step is to reach out to the right customer advocates.
3. Build a customer outreach list
Referrals are a key part of customer advocacy, and it is critical to have clarity on the list of customers you want to reach out to.
Having this goal in mind helped us determine the number of new signups we need from referrals, which in turn helped us build a list of existing customers to reach out to. Having a tiered list based on account size, long time customers, recent customers and more, helps in taking the right outreach approach.
4. Setting up the referral criteria and rewards
The next step is to develop a specific plan on how you want to set up the referral program—the eligibility criteria for customers to participate, the rewards structure, and program implementation.
Here’s how we set our program up:
We wanted our referral program to be restricted to paid customers only. Our minimum eligibility criteria was that the referrer should be part of a customer organization that has at least one paid license.
The logic behind this is that free users of Avoma might not have experienced the complete capabilities and the collaborative workflow of our conversation intelligence platform.
After many iterations, we chose to go with the ‘advocate reward’ model. Advocate reward refers to the reward you offer to your customers for advocating/referring your product to their network. Here’s the reward structure we came up with:
- Commission: 10% of the subscription revenue generated in the first year from the referred customer signup
- Referral pay out: Monthly
- Payout format: Customers can choose to receive Avoma Credit (or) get paid via Paypal
However, rewards need not be limited to the payout models such as cash or platform credits. You can also choose other incentive/reward structures such as:
Two-sided referral reward: A two-sided referral program means that both sides of the referral get rewarded for a successful referral. The advocate gets the referral reward, and the new customer gets a discounted offer.
Bonus Rewards: These are additional rewards to encourage specific behavior. For example, you can create variable rewards, where the actual reward is based on how many referrals your customer sends your way.
During the implementation phase a lot of questions pop up. Here are a few questions that came our way:
- Should we build our own referral system? Or should we subscribe to an external referral software?
- How do we want the referral attributions to work?
- How should the referral links be generated and distributed?
- What would make an individual from a customer organization use the referral mechanism? (exactly the reason why we have a Paypal payout option and didn’t confine it to Avoma credits)
- What if a referred prospect signs up without using a referral code?
All of these questions became part of our evaluation criteria for a customer referral software.
5. Choosing the right software for your referral program
The next step in the sequence is the customer referral software. We decided not to build our own referral software as it meant taking time away from our core focus area. So we started evaluating referral softwares available in the market.
Most referral platforms were built for ecommerce (no surprise there). Here are some of the solutions we evaluated:
And finally, we went with First Promoter, a SaaS-specific customer referral platform that answered most of the questions discussed in the ‘Implementation considerations’ section.
The system should be able to track referrals and calculate rewards which need to be paid out to customers.
6. Have an SLA for your referral follow up
Once you’ve chosen a referral software, make sure you have a clear SLA for reaching out to incoming referral leads. One way to ensure leads don’t slip through the cracks is to set up a round-robin SDR assignment so that your SDRs always reach out to the referrals on time. You could also use a conversation intelligence tool like Avoma to automate the recording, transcription, and note-taking processes for these conversations so that your AEs have enough context to take over the sales conversation from the SDRs seamlessly. The more coordinated the approach, the more chances of closing the deal.
7. Metrics to measure success of your referral program
Finally, you need to know if the referral program yields the results you aim to achieve. Here are some metrics that might help you measure the success of your program:
The participation rate refers to the percentage of people who signed up for your program from the list of customers you reached out to. It is a sign-up metric and doesn’t necessarily give you the percentage of customers who referred a customer to you. The point of measuring participation rate is to know how targeted your customer outreach is.
Share rate refers to the percentage of customer advocates who sent you referrals. You can go a level deeper and try to understand how many times a customer sent you a referral and the most used channel to make a referral. Measuring ‘share rate’ helps you fix gaps in the program and helps you double down on the channel that works best.
Finally, you need to know how many referred leads signed up for your product and became paid customers. And needless to say, it helps you prove your referral program’s ROI.
Going by our experience at Avoma, we can say about 12% of net new revenue comes from our referral program. And here’s how we see it:
- If the new revenue from referrals is less than 5% – your program has a lot of gaps that need to be fixed.
- If it’s around 10% – it’s a great start. Keep optimizing your way up.
- And it’s 15% or more – you’re getting ideal results. Keep the momentum going.
Lastly, there’s always room for improvement
What we have discussed throughout this blog is the approach we took. It’s not perfect, but it’s an approach that felt logical for us as we got started. Hence, there’s always scope for improvement. While you might want to adopt some parts of the approach discussed above in your business context, we would highly recommend that you take some time to figure out what works for you and what doesn't.
We hope this post adds value to your journey.