When done effectively, digital marketing strategies can grow your business. Two often interchanged and confused strategies are affiliate marketing and referral marketing. While both deal with rewarding people for promoting your business, there are several differences that can impact your business differently. Exploring the key similarities and differences will help you decide which strategy is best suited for your needs.

What is referral marketing?

Referral marketing involves rewarding existing customers for every successful lead or sale they refer to your business. You usually provide them with a unique referral link to help track their referrals. Rewards are generally discount vouchers, gift cards, or a one-time upgrade designed to enhance the customer’s current experience of your product or service.

In most referral programs, the number of people they can refer is also limited. Customers often spread the word to their family, friends, and immediate social circle. They don’t need to be influencers with a loyal audience to become successful referrers.

Word-of-mouth and personal recommendations are still considered the best form of advertising. According to recent statistics, 88% of people will trust a brand personally recommended by someone they know, and 23% of customers always talk about their favorite brands to their social circle. A referral program captures this segment of your customers and gives them an extra incentive to discuss your offers.

How does referral marketing work?

You can implement a referral program year-round or match it with the current season to create more hype. Once a customer makes a purchase, they receive a unique code that their family and friends can use upon checkout. If you offer a subscription service, you can give them a unique referral link where their referrals can sign up. You can also set up an email or messaging campaign where you inform existing customers that there’s a referral program happening.

The referrer gets rewarded when one of their referrals uses their code or link.

Some common referral campaigns are:

• Contests and giveaways

Customers are encouraged to get their friends to sign up or make a purchase for a chance to win a huge prize. People’s inherent desire to win something is a significant success factor for this program. However, aim for conversions (i.e., product sign-ups and purchases) instead of mere leads (i.e., email sign-ups) to ensure you don’t get spammy referrals.

• Social gifting

Customers are more likely to refer if they know they’re giving their friends value and are getting rewarded for it. Double incentives like “give $15, get %15” work better than “get $25 for every 5 referrals.” The two-way motivation works on people’s altruism to encourage them to reach out to as many people as possible.

One famous example of this type of reward is Dropbox. The cloud storage platform launched in 2008 and grew by 3900% in 15 months due to a double incentive referral program. Every friend who signs up will get 500MB of free space for both the new and existing accounts. The program had a maximum of 16GB of free space for each person.

• Customer loyalty tiers

Encourage customers to refer multiple times by giving them added benefits as the number of successful referrals increases. Accessing more significant rewards is a huge motivator to keep hitting the qualifying conditions.

Pros & Cons of Referral Programs

For every existing customer, it’s possible to gain 2-3 new customers via referral alone. When customers become brand advocates, they will be a powerful force in promoting your business. The right incentives will motivate them to bring in the people they know will benefit from your offer.

Most referral programs produce high-quality leads because current customers are talking to the same market who will most likely purchase your products or services.

However, a referral program may not be enough to grow your business if you have a small existing customer base. Also, you have to ensure you have enough margins to absorb the additional discounts you’re giving away.

What is affiliate marketing?

Affiliate marketing is a performance-based marketing model that rewards people with loyal audiences for every successful lead they bring to a business. It usually involves influencers, brand ambassadors, bloggers, and other partners who already have a thriving audience that you want to target with your offer. They may or may not be existing customers and are not required to make any purchase from your business.

Affiliate marketing is a multi-billion dollar industry that drives business awareness and sales for small businesses and huge enterprises alike. Rewards are usually in the form of cash, which is automatically paid out once a successful lead is confirmed. The more customers an affiliate can get, the higher their total earnings will be. This incentivizes them to promote their affiliate links to as many people as possible.

How does affiliate marketing work?

Affiliates are provided unique, trackable affiliate links to incorporate into their content. They can include the links in their social media posts, blog posts, or video content. The affiliates also promote their links through paid advertising or organic methods. You can give them the freedom to design their marketing materials or provide them with templates they can readily use.

Every customer that clicks on these links and completes a purchase is attributed to them. An affiliate marketing software tool makes tracking easy and payouts automatic.

When looking for affiliates, you can either seek the help of an existing affiliate network or build your own. An existing affiliate network will have a vast pool of affiliates specific to your niche and ready to promote your products. However, they can charge a massive commission for connecting you to these affiliates. If you decide to build your own network, you must conduct affiliate program launches and invest in marketing to drive traffic to your affiliate sign-up page. Depending on your products and your goals, either of these options can be a good choice.

Pros and Cons of Affiliate Marketing

Affiliate marketing is a great way to scale a business fast. If you have a small existing customer base, you can quickly reach the right market by tapping affiliates. It’s also much less costly than running other types of advertising because you are only paying for successful leads, not just impressions or leads who are unlikely to purchase. Since affiliates already have an established audience, finding the influencers within your niche and tapping their followers is a wise marketing move.

However, affiliate marketing also has its drawbacks. Despite providing brand guidelines and marketing templates, you are leaving control of your brand to the affiliates. Some may not accurately represent your brand, causing brand confusion or a n inconsistent reputation. Since affiliates are not required to become paying customers, the chances that people will follow their recommendations are lower than referral marketing. Lastly, affiliate links can be manipulated and hacked. It’s possible to get fraudulent leads that can harm your business. However, don’t fret because most of these drawbacks can be addressed with the proper affiliate marketing program guidelines.

Affiliate vs. Referral Marketing: The Key Similarities

After covering the basic definitions of affiliate marketing and referral marketing, let’s look at their key similarities. Both marketing strategies are good sources of high-quality leads and have the potential to grow your business.

1. Driven by rewards

Both strategies rely on human’s basic instinct to be recognized and rewarded. Referrers and affiliates are motivated to promote your business to their circles with attractive incentives. Just make sure to offer the right incentives relevant to your audience. Make the incentives compelling and engaging enough that they will feel truly rewarded for their promotional efforts.

2. Cost efficient

Referral and affiliate marketing have low overhead costs and a strong return on investment. Since you’re offering discounts and commissions only for successful purchases, you’ve already earned the sale before the payout.

3. Repeatable marketing channels

Affiliate and referral marketing rely on other parties to drive tremendous business growth. Promotions are done through word of mouth and by sharing unique codes and links. Both can be conducted year-round and heavily promoted on certain occasions.

4. Runs on mutual trust

Both strategies rely on a social currency where referrers and affiliates stake their reputation with the brand they’re promoting. They can lose credibility with their audiences and peers if they promote a bad product. Audiences trust them to promote a reputable product or service for their needs, increasing their likelihood of purchasing.

Affiliate vs. Referral Marketing: The Key Differences

Understanding the differences between these strategies will help you determine which method best suits your business growth.

1. The person promoting the business

Referral marketing taps existing customers who will gladly share their satisfaction with your product. The referral incentive is an extra nudge for them to do so. Customers get a unique referral link when they make a purchase.

In contrast, affiliate marketing taps anyone who wants to earn additional income or commissions from promoting products. They aren’t required to make any purchases and may not have any experience with your brand. Affiliates get their unique affiliate link from the affiliate network you’ve tapped or by signing up to the affiliate program. You can also create qualifiers to ensure you tap the right affiliates.

2. The relationship between the referrer and the potential customer

Referral marketing works best when there’s an existing relationship between the referrer and the potential customer. That’s why referrals are usually friends, families, or peers. The potential customer knows the person making the referral and will more likely trust the recommendation. Likewise, the referrer often knows the most appropriate people within their circle who would benefit from your product and will most likely sign up.

Affiliate marketing doesn’t require the potential customer to know the affiliate personally. They need to trust the recommendation based on the affiliate’s reputation. For example, Instagram followers may not personally know the person recommending a product, but because of the influencer’s reputation, they will likely buy the influencer’s recommendations.

3. The reward types

Rewards are the driving force behind both referral and affiliate marketing programs. Customers who patronize your business will be more motivated to make referrals if there’s an enticing incentive.

With referral marketing, you can offer customers different rewards like discount coupons, brand swags, service upgrades, cash backs, store credits, or gift cards. You can reward both the referrer and the new customer (dual-incentive), or you can reward only one (single-incentives).

In affiliate marketing, affiliates expect either a flat fee or a percentage of sales. Depending on their performance, you can also give them free products. Potential customers are not incentivized, although some affiliates encourage customers to sign up using their affiliate links by offering discounts or other product bundles. For example, by bundling their coaching course with a more extensive program with which they are affiliated, YouTube influencers can encourage their audience to buy a more comprehensive program.

4. The way links are shared

Both affiliate and referral marketing use unique, trackable links. However, they are shared differently.

Referral links are shared directly among friends and family using emails, social media messages, or SMS. This involves personal engagement, which increases the chances of a successful referral.

On the other hand, affiliate links are shared in public channels like social media posts, blog posts, video links, and even in paid channels. The affiliate relies on customers landing on their affiliate pages and clicking their links. They create situations that encourage customers to make the purchase either by writing reviews, making direct promotions, or doing comparative content.

5. The customer lifetime value

Customer lifetime value (CLV) measures how much you can potentially earn from a customer in their entire lifetime. Customers can either make one-time purchases or repeated regular purchases.

Referral marketing works best with products with high CLV, such as subscription programs. Customers are expected to spend on the product repeatedly, and a high level of trust is essential to win them over.

Affiliate marketing relies on one-time purchases since affiliates are rewarded for single purchases and focus on quantity and scale. Products and services with lower CLV work well with affiliate promotions.

However, these are not strict definitions, and you can always use a referral marketing strategy for low CLV products and an affiliate marketing program for high CLV products. Make sure to always consider other factors like your existing customer base, business goals, and profitability targets.

Choosing the Right Program for Your Business

When determining the right marketing strategy, there is no one-size-fits-all approach. You must thoroughly understand your target market, products, and business goals before choosing which approach will work for you.

Both affiliate marketing and referral marketing have great potential to grow your business by increasing your customer base. However, not implementing them properly can have drastic consequences such as lost revenues and a bad business reputation. When deciding which strategy to use, ensure that you set up strict qualifying guidelines, provide attractive incentives, and protect your brand reputation and bottom line.

Whatever program you choose, you need a stellar offer that will make referrers and affiliates proud to recommend it every time. The best marketing strategy cannot mask a lousy product, and there is no substitute for a good product. Invest in your brand and make a compelling offer that makes it easy for others to drive business to you.

If you’ve decided to pursue affiliate marketing and need professional guidance, check out my affiliate marketing consultation program. I can help you build and run a successful and sustainable affiliate program guaranteed to bring qualified leads every time. Check out the details here.