Recently, I came across a very detailed write-up of how popular newsletter The Morning Brew’s referral system works.  You can read all the nuts and bolts here.

There were two key points that struck me as I was reading the post that I wanted to highlight here. First, this quote from Tyler Denk, who created the system, discussing the prizes that current subscribers get based on their number of referrals, and the CPA (Cost Per Acquistion) for each:

5 referrals: we mail readers Morning Brew stickers. Bulk ordering 10,000 die cut stickers from StickerMule breaks down to a unit cost of $0.20/sticker and our pre-stamped envelopes cost roughly $0.65/envelope. That totals roughly $1.25 in cost, or a $0.25 CPA (cost per acquisition) for 5 new subscribers to the Brew.

For reference, the CPA for us on Facebook/Instagram, our largest paid acquisition channels, is typically between $3 and $5.

10 referrals: readers gain access to our exclusive “Insider” community. The private Facebook group, which is quickly approaching 10,000 members, is the place to discuss the latest stories, trends, and events in business, pursue career opportunities, and network with other like-minded Brew readers. Again, this reward comes at no real cost to Morning Brew.

To this point: In exchange for 10 referrals, we have provided value in the form of premium content, an exclusive community, and swag…all at the cost of $1.25.

15 referrals: we mail readers a custom Morning Brew silicone phone wallet. The cost of the phone wallet is $1.50, and the cost of the pre-stamped envelopes is $0.65/envelope.

When someone refers 15 people, the CPA on those referred is $0.23 ((cost of phone wallet + stickers)/15). We’ve actually managed to spend less per subscriber as someone continues to refer additional people.

For those who are bad at math, like me, it means that The Morning Brew’s cost to acquire a new subscriber is typically $3-5 each if they go the Instagram or Facebook ads route. If they use their referral system, the CPA plummets to 23-25 cents EACH.

One of the key points I make in my book Think Like a Rock Star is to challenge companies to rethink their customer acquisition strategy. The reason the Cost Per Acquisition for each new customer is so high for so many companies is because of the channels used. Most companies rely on traditional marketing in print, television and increasingly digital, to acquire new customers. Those channels are not cheap, and the acquisition rate for these channels is typically very low, which drives the acquisition cost even higher.

Yet when your customer acquisition efforts flow through your current customers (or in the case of The Morning Brew, its current subscribers), then the acquisition cost plummets. Research has shown this for years, but the simple reality is that we trust our friends and family more than we trust brands. That’s just reality. If the brand runs a commercial and tells us to buy it’s product, we will likely ignore it.  But if our brother or best friend tells us to buy that same product, we will listen.

Here’s the second quote from Tyler that I also thought was very powerful:

I also think that the referral program actually boosts engagement for the person who refers others. If someone goes out of their way to share a product or service with their friends, classmates, co-workers, etc., I think the likelihood they continue to engage with that product increases. No one wants to look foolish by abandoning a product they’ve so vehemently recommended so soon after making that recommendation

Bingo, these same subscribers that referred the new subscribers, will then become sources of ongoing encouragement, education, and even customer service for The Morning Brew. They current subscribers will likely check in on their buddy that they just referred in as a new subscriber, and ask them how they are liking The Morning Brew. Or if the referral has a question about The Morning Brew, they will probably reach out to the friend that referred them, rather than The Morning Brew itself. Which could also be a cost-savings for The Morning Brew in the form of a deflected inquiry to customer service.

This is why I am such a proponent of customer/brand advocacy programs and loyalty programs. If structured correctly, they can always become a pipeline for more engaged customers who have a higher lifetime value, with a much lower acquisition cost.

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