Referral Marketing vs. Online Advertising: Impact on Business Growth

In the digital age, online advertising is often hailed as the best method for businesses to reach their target audience. Platforms like Google, Facebook, Instagram, and LinkedIn offer comprehensive targeting options and the potential for broad reach. However, despite its wide usage, online advertising is not the only tool at a company's disposal. Enter referral marketing, an age-old, proven strategy that has seen a resurgence in recent years through digitization. Not only can referral marketing be more cost-effective, but it also has the potential for a longer-term growth impact on businesses.

Online Advertising: The Cost Factor

Online advertising, in its many forms, can undoubtedly deliver results. Google Ads offers vast reach, while Facebook and Instagram allow businesses to engage audiences with appealing visuals. But these results come at a price. According to WordStream, for the real estate industry, the average CPL is at $44.70 for search and for mortgages (finance) it's $74.44. Social media platforms aren't far behind, with the average CPC for social media ranging from $35.52 for rentals up to $96.54 for selling a home.

These costs, however, only account for the initial lead. Converting those clicks into actual customers is another challenge. Studies show that the average conversion rate on leads for online advertising across the real estate industry hovers between 0.4 - 1.2% according to The National Association of Realtors (NAR). This means that to acquire a single customer, businesses could be spending hundreds, if not thousands, on advertising.

Using the conservative low-end of CPL and a 1% conversion rate, that means the agent takes to 100 people to get 1 deal, we can determine that $44 leads are actually costing agents around $4,400 to get a closed deal. When you consider commission though it’s worth the expense and the reason why leads in this industry are so expensive. 

Using the same logic if you’re in the building business, your $95.54 leads are costing you around $9,500 for closed deals. 

Similar metrics hold true in the mortgage industry.

This is easy to calculate for yourself, just figure out your total ad spend for reasonable sample time period - 3-6 months is a good starting point. Then divide the total number of closed deals generated by those activities and you have your CPA. Make sure to include all associated expenses of management, content generation etc. 

Do you know your holistic cost per acquisition (CPA)? Does it compare? Are you beating the averages? 

As you scale your business you'll need to consider adding the cost of managing and optimizing these campaigns. Online advertising is not a 'set and forget' game; it requires regular monitoring, adjustment, and response to ever-changing algorithms. According to Glassdoor, the average salary of a digital marketing manager in the U.S. is around $73,114 per year. This expense doesn't even take into account the additional costs associated with marketing software or agencies that are often required to manage complex, multi-platform campaigns.

Furthermore, online advertising results are often unpredictable, with results fluctuating due to factors beyond a business's control. These can range from algorithm changes to increased competition, which can drive up CPC costs and make it harder to reach target audiences.

In conclusion, while online advertising has its place and can indeed generate great leads and build brand awareness, the cost per acquisition can be quite high, and the process often involves a significant investment of both time and resources. This realization leads many businesses to seek more cost-effective, reliable, and sustainable methods of customer acquisition and retention, such as referral marketing.

Referral Marketing: Lower Costs, Higher Conversion Rates

Referral marketing presents a compelling alternative to online advertising. According to Nielsen, 92% of consumers trust referrals from people they know, making them a powerful method to gain new customers. Wharton Business School reports that the lifetime value (LTV) of a referred customer is 16% higher than that of a non-referred customer, leading to more significant long-term returns on initial investment.

The financial appeal of referral marketing is further accentuated when we consider the cost of incentivizing referrals. More than 50% of consumers indicate they are more likely to send a referral when there’s an incentive and on average incentive programs 4x referrals. However, these rewards don't need to be exorbitantly expensive. In fact, take it from PayPal who hit 1M users after launching a referral program that offered just $10 to the referrer and $10 to the recipient. 

Be careful though, every industry is different, and in our experience consumers do psychologically value your offer against your revenue if they know what that is. In real estate for instance, we know from operating Locorum a $10 reward can be viewed as cheap by consumers considering the benefit to the business. Moral of the story here is it doesn't need to be thousands of dollars.

For our real estate partners, we have them compare their CPA to what will be a very attractive referral incentive to their customers. Depending on the business this can range from $300-2,000 (sometimes higher). They can set a fixed or variable budget allowing them to maintain a fixed acquisition cost relative to revenue. You can say, “I want to spend 10% of revenue on marketing” on Locorum and never exceed it. We estimate on average this results in a 50%+ cost savings compared to online marketing for businesses. 

In regards to resource requirements, referral marketing mostly involves communication with existing customers, a task that can be accomplished with much less time and fewer resources than managing ongoing digital campaigns. For many businesses referral marketing may present a more cost-effective, less resource-intensive method for customer acquisition, with the added benefit of longevity. Once a referral program is in place, it can generate referrals and drive growth for years to come, creating a network effect and giving it a significant advantage over the sometimes volatile landscape of online advertising.

Compared to the potentially steep costs of CPC advertising in real estate and the resources required for managing and optimizing these campaigns, the setup and running costs of referral marketing are significantly lower. Tools like Locorum make the setup process quick and easy, allowing businesses to launch a referral program in less than 20 minutes.

The Long-Term Impact of Referral Marketing

Beyond the immediate cost savings, referral marketing carries a longer-term impact on businesses. Referral marketing focuses on nurturing existing customer relationships and leveraging them to attract new customers. This results in a growing network of loyal referrers who not only bring in new customers but also become repeat customers themselves.

Wharton School of Business found that referred customers are 18% more likely to stay with a business over time, contributing to the longevity of a company's client base. Furthermore, referred customers are four times more likely to refer additional customers to your business, creating a self-sustaining loop of growth.

Amplify Referral Marketing with Locorum

Locorum takes the power of referral marketing and amplifies it. Our platform caters specifically to businesses conducting offline transactions like realtors, mortgage brokers, and residential developers. Locorum offers a comprehensive suite of referral marketing tools, all designed to boost customer engagement, attract new customers, and ultimately drive growth.

For example, realtors can use Locorum to incentivize past clients to refer new ones. The client enjoys a reward, and the realtor gains a new, likely long-term, customer. Similarly, residential developers can launch an enterprise-level referral program with Locorum, helping them advertise a professional, trackable program that encourages past clients to drive the growth of new deals.

In conclusion, while online advertising has its place, it's crucial for businesses to explore their other options.