You can calculate the value of referrals and the threshold for going viral with your content or product. Here is how.
Earlier this week I shared how we use the Startup Metrics for Pirates here at Boardview.io. There are two kinds of referrals; product referrals and content referrals, which we called Jackpot moments. These referrals bring new visitors to your website or product trial page and are damn near essential if you want to grow your business.
The question of course is…
How big is that bloody Jackpot?
Here is how you can calculate the value of a referral using the AARRR set-up and some hypothetical numbers on conversions and CLV. And, yes, we are aware some numbers are pretty optimistic so to speak.
In this example we start with the Content Referral in the left column.
- 1000 people will potentially see and act on the average content referral.
- 1% is the conversion rate for shared content, which means out of 1000 people who potentially see the shared content, 10 individuals will enter the Acquisition stage. From there on the road to revenue follows the Product Journey.
- 1% of the visitors on the website will start a product trial in the Product Activation stage.
- 50% of the people who started the product trial will become a paying customer.
- $1000 is the Customer Lifetime Value of the average paying customer.
- 5 Friends or colleagues of the paying customer see the Product Referral and are invited to try the product.
- 50% of the invited friends or colleagues will try the product, which is very high.
In this hypothetical example the Content Referral generates a Revenue of $50,- and the Product Referral $1250,-
It unfortunately does not mean these Revenue contribution estimations are the amounts you can actually spend to generate the referrals. Cost price of the product, associated services and marketing costs to get the initial visitor to the website have not been included in the equation.
In a SaaS business some benchmark numbers suggest that if a customer stays for 3 years, the SaaS Marketing costs should be equal to the first year of customer revenue. If the CLV is $1000,-, the projected marketing costs should be less than $1250,-/3 = $417,- per new customer to run a healthy business.
Another interesting number in this example is the Product referral Value $1250,- which is higher than the CLV of $1000,-. How can a Product Referral be worth more than the customer who did the referral? Well, in this example the Product is going viral.
Calculate the ‘virality factor’
The K-Factor formula
I = Invites sent
C= Conversion rate achieved
K-Factor = I x C
A K-factor greater than 1 indicates exponential growth. A k-factor less than 1 indicates exponential decline.
The K-factor applied to our hypothetical example looks like this:
In this example the Content K-Factor is 0,125, which means the content is being shared but not going viral. Content sharing is not exponentially growing.
The Product K-Factor is 1,25 which means it is exponentially growing. This is why the value of a Product Referral ($1250,-) is higher than the CLV ($1000,-) itself.
Two Jackpot Moments; one is silver, one is gold.
In this hypothetical example, a product referral is worth 25 times more than a content referral. Gold is worth 25 times more than silver. Two referrals but a completely different value to your business as a result of different conversion rates and a different entry point to the AARRR funnel.
At Boardview.io we added this dual Product and Content Referral logic to our own value map. If you wish to use this specific AARRR business template for managing your own start-up, drop me a message.