Referral vs. affiliate marketing – Which is better for my business?

When it comes to marketing your business, there are many different options to choose from. Two popular choices are referral marketing and affiliate marketing. But what exactly is the difference between the two? And, more importantly, how do you know which one is right for your business? In this post, we’ll compare and contrast referral and affiliate marketing in terms of types of partners, traffic, conversion rates and other characteristics, so you can decide which one is best for you. So read on to learn more.

What is referral marketing?

Referral marketing is a marketing strategy that rewards existing customers for referring new customers to your business. Typically, you offer your referral partners an incentive for every successful referral, such as a discount or a free product or service.

Many businesses from different sectors rely on referral marketing to drive growth. Examples include financial service providers, insurance companies and even luxury brands.

How do referral programs work?

These marketing programs are usually simple to set up and run. In short, you start by giving your customers a unique referral code or link that they can share with their friends. Then, when someone uses that code or link to sign up for your service, your referring customer will be credited with the referral, and you’ll earn a new paying customer.

The link or code is known as a referral link or referral code. These are generated automatically for each user using referral software tools, which also keep track of successful referrals, assign them to the right person, and other aspects of the referral program.

Referral marketing pros and cons

ProsCons
It’s a cost-effective way to attract new customers.Referral partners are more likely to be loyal to your business.Referral partners are more likely to be vocal advocates for your business.Referred customers often have a higher lifetime value (CLV) than others.These programs only work well if you have a large user base.You might not get as many referrals as you’d like.Not all users may want to participate in the program unless you offer juicy rewards.

What affiliate marketing?

Like referral marketing, affiliate marketing is also a type of performance-based marketing where you pay someone to generate sales or leads for your business. However, unlike referral partners, affiliates are not necessarily your customers but rather third-party individuals or even companies you pay to promote your products or services to their customers or audience.

How does affiliate marketing work?

Affiliate marketing programs also work by setting up a special affiliate tracking code or link for your affiliates to use. Affiliates will publish this link on their website, blog, YouTube channel, email and other channels to reach their audience and/or customers and promote your brand.

Affiliate marketing programs are usually run through an affiliate network, which provides the administrative and technical infrastructure needed to manage the program. When someone clicks on an affiliate’s link or banner ad and makes a purchase, the affiliate network records that sale and pays the affiliate a commission.

Affiliate marketing pros and cons

ProsCons
Affiliates can reach a large audience quickly and easily.It’s a cost-effective way to generate traffic, leads and sales.You only pay commissions on sales generated by affiliates, not leads.An affiliate program’s reach doesn’t depend on your number of customers.Affiliates may not be as motivated to promote your products as referral partners.There is potential for fraud and affiliate hijacking.Affiliates may not be as knowledgeable about your products as referral partners.

Differences between referral and affiliate marketing

Although similar in some ways, referral and affiliate marketing programs differ in terms of several characteristics that go from how they work to how they perform from an ROI point of view.

The following table summarizes the key differences between these two popular marketing strategies. Each particular difference is explained below.

Referral ProgramsAffiliate Programs
Types of PartnersCurrent customers or usersThird-party brand advocates (affiliate marketers)
Channel and Target AudienceDirect contact channels with friends, family and colleagues.Direct and indirect channels of communication with affiliates’ followers, blog audience, website audience, email subscribers, etc.
Types of RewardsAltruistic emotions.Cash and non-cash rewardsCash rewards (fixed fee or percentage of sales)
Frequency of Reward PayoutUsually once every successful referralUsually monthly payouts
Driving ForceSharing, helping others and receiving rewards.Profits
Website TrafficDoesn’t usually generate much traffic.Has the potential to generate a large boost in traffic.
Conversion Rate4x higher than other forms of advertisementLower
ProfitabilityMore profitableLess profitable
Customer Lifetime Value (CLV)Higher CLVNot as high CLV
ScalabilityScales with user or customer base.Scales with the number of affiliates, irrespective of the user base.

Types of Partners

The most obvious difference between these two types of marketing programs is the person who is actively promoting your brand. In the case of referral programs, referral partners are your current customers or users. They’re people who know your brand and your product very well from personal experience.

Affiliates, on the other hand, are seldom customers of your brand. They’re usually bloggers, digital marketers and even other business owners who see your affiliate program as an opportunity to make passive income.

Channel and Target Audience

The channels and audiences of referral and affiliate marketing programs are also different. Referral marketing is more focused on word-of-mouth marketing, that is, getting people to refer your product or service to others they know. This type of marketing usually relies on emails and direct messages to friends, family and colleagues.

Affiliate marketing, meanwhile, takes a different route. It uses indirect channels that have a much wider reach, like blog posts, social media and company websites, while also harnessing the power of direct marketing channels like email and others.

Types of Rewards

Another key difference between referral and affiliate marketing programs is the type of rewards offered to partners. Referral partners are typically rewarded with discounts, free products or some other form of exclusive treatment directly related to your product or service, although some also offer caff bonuses.

Affiliates, on the other hand, are usually rewarded with a commission for every sale they generate. The commission percentage varies depending on the program, but it’s usually around 10-30%.

Frequency of Reward Payout

How often you payout referral and affiliate rewards also differs. Referral partners usually receive their rewards right after a referred customer makes a purchase. This allows them to feel the satisfaction of knowing that they helped contribute to the sale.

Affiliates, on the other hand, usually have to wait until they’ve generated a certain amount of sales before they can cash in on their commissions, or the cash in only once a month.

Driving Force

The success of referral programs relies on two forces. On the one hand, there’s the reward the referral partner gets, but on the other, there’s the feeling of satisfaction that comes with helping someone else solve a problem by referring them to your product or by getting them a reward as well.

On the other hand, affiliate marketing is driven solely by profits and the possibility of obtaining more value from an existing audience or customer base.

Website Traffic

Unless you have a huge user base, referral marketing usually doesn’t bring in a tremendous amount of traffic to your website since partners only distribute their referral links within their limited number of friends, family and other acquaintances. But affiliates are in the business of numbers. They frequently are experienced marketers with a much wider reach who’ll send tons of traffic your way.

Conversion Rates

Traffic is worthless if it doesn’t convert into sales. This is where referral marketing has the upper hand compared to affiliate marketing. 88% of consumers trust personal recommendations from someone they know more than any other form of advertisement, according to the most recent consumer report by Nielsen. Consequently, referral traffic is 4X more likely to convert than organic traffic.

Affiliate marketing can also be effective if you choose your affiliates wisely (i.e., if their audience aligns well with your target market segment). In some cases, however, even if conversions are low, the high traffic volume can make up for the difference in conversion rate.

Profitability

For the reasons stated above, referral marketing can produce more sales with less traffic and fewer leads, making it more profitable than affiliate marketing.

Affiliate marketing can also be profitable, but it largely depends on the program you choose and the commission percentage you offer your affiliates. However, affiliate marketing is less profitable than referral marketing in most cases.

Customer Lifetime Value (CLV)

The customer lifetime value (CLV) is a key metric to measure the profitability of a referral or affiliate marketing program. This is the average amount of money a customer spends with you over the course of their relationship with your company.

Referral marketing has a higher CLV than affiliate marketing because it builds trust and long-term relationships. Affiliate marketing, on the other hand, largely depends on how effective your affiliates are at converting leads into customers.

For example, the Harvard Business Review reported that referred customers are 18% more likely to stay with a bank, generating a much higher lifetime customer value than customers who were not referred.

Scalability

While both referral and affiliate marketing are easily scalable, they differ in how they can be scaled. Referral marketing scales effortlessly with your user base. This implies that it’s not an effective way to market your brand when you only have a few customers.

On the other hand, affiliate marketing can scale much more rapidly at any stage of your business’s life cycle. All you have to do is find more affiliates who are willing to promote your product or service.

What type of business is referral marketing best for?

Referral marketing is particularly well-suited for businesses that rely on building trust and long-term relationships with their customers, such as banks, credit unions, insurance companies and other financial services providers. It’s also good for businesses that offer a high-value product or service, such as luxury brands, car dealerships and others.

Choosing referral marketing over affiliate marketing also depends on your goals. If your goal is to create a loyal customer base, referral marketing is the answer.

What type of business is affiliate marketing best for?

Affiliate marketing is a great option for businesses with large product catalogs or a wide range of services, especially if those products and services are on the cheaper side of the spectrum. It’s ideal for businesses that focus on increasing sales rather than brand loyalty and operate on a business model that doesn’t require too much trust.

On the other hand, affiliate marketing is also good for businesses looking to expand their reach into new markets or demographics. It comes down to associating with affiliates that already target that particular market. For example, a U.S.-based crypto wallet provider may be interested in expanding to the Canadian market. In this case, it would make sense to launch an affiliate program to partner with experts in the Canadian Bitcoin space who have a large following.

The bottom line

Referral marketing is more profitable, scalable and better suited for businesses that rely on trust and long-term relationships. Affiliate marketing can be profitable, but it largely depends on the program you choose and the commission percentage you offer your affiliates. In most cases, affiliate marketing is less profitable than referral marketing.

Which type of marketing should your business prefer? It depends on your goals and what type of business you have. If you’re looking to create a loyal customer base, referral marketing is the way to go. If you’re looking to expand your reach into new markets or demographics, affiliate marketing may be a better option.

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