Would a referral program (e.g., give existing users credit or a discount for each new customer they refer) make sense for our business, or would it cut too much into revenue per customer acquired?

Below is our response based on the concepts in our saas pricing book, Price to Scale:

Answer: A referral program can make sense—but only if you carefully balance the lower acquisition cost against the discount or credit offered. The key is ensuring the incentive doesn’t cut too deeply into your revenue per customer.

Here are some points drawn from our book’s methodology:

• Strategic Balance: Our book emphasizes balancing cost of acquisition with long-term revenue growth. A referral program is a lower-cost user acquisition tactic, but it has to be calibrated so that the discount or credit doesn’t erode the overall customer lifetime value.

• Metric-Driven Approach: Similar to how we analyze pricing trade-offs and deal discounting (as noted on pages 83 and 287), you need to measure how much revenue you’re willing to forego per customer in exchange for acquiring a new one. Ensure that the referral incentive is set at a level where, even after the discount, your net revenue math remains robust.

• Customer Segmentation and Retention: Our book discusses tailoring price reductions and offers to different customer segments. A referral program should be designed to reward loyal customers while also driving new user growth. In effect, it can serve as a marketing lever if it’s structured to incentivize long-term engagement rather than just a one-time discount.

Practical Application:

Quantify your customer acquisition cost and establish benchmarks. Determine what portion of that cost can be safely traded for a referral discount without harming your margin.
Test the process by rolling out the referral program in a controlled environment. Track its impact on user acquisition, overall revenue, and customer lifetime value.
Adjust the credit or discount levels based on how they affect revenue per customer and ensure alignment with your broader pricing strategy.

Takeaway:
A well-structured referral program, guided by the metrics and strategic balance outlined in Price to Scale, can be a valuable component of your growth strategy. However, it must be executed with clear limits on discounting to maintain healthy revenue per customer.