Referral programme rewards: what each type really costs
Compare cash, discount, store credit, gift and donation rewards on one order, with the maths, and set a ceiling from your own margin.
You have decided to pay for referrals. Cash, a discount, store credit and a gift all feel different to give, and they cost you different things. The clearest way to see the difference is to put them side by side on one real order.
All figures below are invented to show the arithmetic. Use your own.
Start with one referred order
Take a typical order from a referred customer and write down three numbers:
- Order value: £100
- Cost of goods: £60
- Gross profit: £40 (a 40% gross margin)
Everything in the rest of this guide uses that single basket. "Contribution" below means revenue minus cost of goods minus any reward cash paid out. It ignores payment fees, administration time and VAT, which you should add for your own business.
Cash and discount
A £20 cash reward paid on that order leaves £20 of contribution: £40 of gross profit less £20.
A £20 discount for the friend on the same basket cuts revenue from £100 to £80 while your costs stay at £60. Contribution falls from £40 to £20, a £20 reduction.
The two are the same size here, but they land differently. Cash leaves your bank account. A discount shows up as lower revenue. If you give both on one order, a £20 cash reward and a £20 discount, contribution on that first order is zero: £80 of revenue, £60 of goods and £20 of cash out.
| Reward on the £100 basket | Revenue | Cost of goods | Cash reward | Contribution |
|---|---|---|---|---|
| No reward | £100 | £60 | £0 | £40 |
| £20 cash to the referrer | £100 | £60 | £20 | £20 |
| £20 discount to the friend | £80 | £60 | £0 | £20 |
| Both | £80 | £60 | £20 | £0 |
Store credit: the maths and the traps
Store credit is often described as cheaper than cash. Whether it is depends on how it is used.
If a £20 credit is applied to an otherwise identical £100 basket with £60 of cost of goods, revenue falls from £100 to £80 and contribution falls from £40 to £20. That is a £20 reduction, the same as the discount.
If instead you give £20 of goods as a standalone reward, at the same 60% cost of goods it costs you about £12 in goods before fulfilment and admin, provided the fulfilment is genuinely additional to sales you would have made anyway.
If the credit is spent on a basket that would not otherwise have existed, the comparison is different, and you should work it out separately rather than assume.
A few matters are separate from the margin sum and should not simply be netted off it: the liability a credit creates, VAT, expiry, credit that is never used, and tax treatment. Ask your adviser how they apply to your business.
Gifts and charity donations
A gift costs its purchase price plus delivery. If you buy a £15 gift and pay £3 to send it, the reward costs you £18 before any admin.
A donation costs you the amount you donate. If you promise a £20 donation for each qualified referral, that is £20 of cost to you. Donation promises can raise separate questions about how they are described and agreed. Our guide on how much to donate per sale includes a break-even formula, and our guide on commercial participators covers the UK rules for charity-linked sales. This guide does not reach a conclusion on tax or legal treatment of any reward type, and you should take advice on it.
Fill-in cost table and ceiling rule
Copy this table and fill it in for your own basket. Add rows for anything you offer.
| Reward type | Revenue effect | Goods or cash cost | Admin time and fees | Contribution on first order | What is not counted |
|---|---|---|---|---|---|
| Cash | |||||
| Discount | |||||
| Store credit | |||||
| Gift | |||||
| Donation |
If you want a ceiling, one illustrative option is to cap total reward spend on the first order at about half of that order's gross profit, which on the example basket is £20 of the £40. That is an arbitrary policy example you can adopt or reject, not an industry norm. A business with strong repeat purchase might set it higher, and one with thin margins might set it lower.
Where Zenko fits
Choosing the reward is the second question. The first is which action to reward, which our guide to choosing the right customer action to reward covers. If you are weighing a donation reward, the cause marketing calculator may help. To ask about a campaign, contact Zenko. Availability and terms are confirmed for each campaign.
Related referral guides
- How to set up a referral programme one decision at a time
- Referral marketing vs paid ads, compared like for like
Frequently asked questions
Is store credit cheaper than cash as a referral reward?
Not automatically. On an identical basket, a £20 credit cuts contribution by £20, the same as a £20 discount. Credit given as a separate £20 of goods costs about the cost of those goods. Liability, VAT, expiry and unused credit are separate questions for your adviser.
Should I reward both the referrer and the friend?
You can, but on a single order the two rewards add together. In the example, £20 cash plus a £20 discount leaves no contribution on that first order. Decide whether repeat purchase justifies that, and write the assumption down.
How big should a referral reward be?
There is no standard amount. One arbitrary example is to cap reward spend at about half of the first order's gross profit. Choose a figure from your own margins, repeat purchase and admin costs.
Sources
- Zenko, How to choose the right customer action to reward: https://www.zenkoprotocol.com/insights/choose-customer-action-to-reward/
- Zenko, Donate a percentage of sales to charity: how much?: https://www.zenkoprotocol.com/insights/how-much-to-donate-per-sale/
- Zenko, Commercial participator agreement: UK rules explained: https://www.zenkoprotocol.com/insights/commercial-participator-agreement/
General information, not legal, tax or accounting advice. Worked examples use invented figures.