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Writer's pictureClaire Hancott

Maximizing Profit from Referral Schemes: Smart Strategies for Business Growth




How to make referral schemes profitable

In the business world, leveraging referral schemes, commissions, and affiliate programs can significantly boost your growth by tapping into new customer bases. Networking groups like BNI exemplify how referrals can be a win-win for both parties. However, it's crucial to strike the right balance when offering commissions to avoid eating into your profits.


Key Metrics to Consider


1. Customer Acquisition Cost (CAC): Know how much it costs to acquire a new customer through your own marketing efforts. For instance, if you spend £1,000 monthly on Google ads and gain five customers, your CAC is £200. This should be your benchmark—don’t offer commissions higher than your CAC, as you could otherwise invest in proven marketing methods.


2. Net Profit Percentage: Calculate your net profit percentage by dividing your net profit by your annual sales. For example, a 10% net profit means you keep £10 for every £100 earned. If your referral fee matches your net profit percentage, you’re essentially giving away all your profit, which isn't sustainable.


Strategic Considerations


Long-Term Customer Value: If a referred customer is likely to become a repeat buyer, offering a higher referral fee might be justified. Assess your customer retention rates and lifetime value to make informed decisions.


Balancing Act: There's no universal rule for setting referral fees; it depends on your specific business dynamics. Always keep your CAC and net profit in mind to avoid compromising your financial health.


By carefully evaluating these metrics and considering the long-term value of customers, you can develop a referral strategy that enhances your business growth while protecting your profits.


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