Affiliate Marketing vs Referral Programs: Which Is Better for Your Business?
So you want to increase sales and brand awareness for your business. Two popular options are affiliate marketing programs and referral programs.
But what exactly is the difference between these two marketing tactics? Which one is right for your company?
In this post, we’ll compare and contrast affiliate marketing and referral programs. We’ll look at the pros and cons of each, as well as tips for setting up and managing successful programs.
Let’s dive in!
What is Affiliate Marketing?
Affiliate marketing is a performance-based marketing strategy where a company rewards affiliate partners for driving traffic and sales. The affiliates promote the company’s products or services using special links. When a visitor clicks on the link and completes a desired action (like making a purchase), the affiliate earns a commission.
Some key things to know about affiliate marketing programs:
- Affiliates are external partners who drive referrals independently. They are not employees of the company.
- Affiliates can be bloggers, social media influencers, online publishers, email list owners, and more.
- Affiliates often have an existing audience they leverage to promote products. But they can also drive new traffic through SEO, social media ads, and other tactics.
- Companies only pay affiliates when a referral actually converts. There is little risk compared to other paid marketing channels.
- Affiliate commissions are often 5-30% of a sale amount. The percentage may vary based on product price, margins, and other factors.
- Leading affiliate marketing networks include ShareASale, Rakuten, CJ Affiliate, Impact, and ClickBank.
Overall, affiliate marketing is performance-based and low-risk. However, affiliates have total control over how and where they promote your brand. You have to find the right partners committed to driving high-quality referrals.
What are Referral Programs?
Referral marketing programs incentivize existing customers to share your brand with friends, family, and colleagues. The referring customers earn a reward when their referrals make a purchase.
Here are some key referral program features:
- Referrers are existing customers, not external partners. They likely have first-hand experience with your products or services.
- Rewards are often a percentage of the referral’s purchase amount or a flat dollar bonus. Rewards over $100 tend to drive more referrals.
- Referral invites can happen directly between peers. However technology platforms like Ambassador, Genius Referrals, and Viral Loops can automate and track referrals.
- Referral programs are often ongoing. But time-bound campaigns with leaderboards and contests can also boost engagement.
- Both the referrer and the referee (the new customer) may get rewards. Two-sided programs tend to see higher referral rates.
- Referral programs can happen directly through a brand’s website or app. No middleman affiliate network is required.
The biggest benefit of referral programs is they turn happy customers into brand evangelists. But you need enough established customers to get started. New companies may prefer affiliate marketing to tap into external audiences.
Now let’s compare some of the key pros and cons of each strategy.
Affiliate Marketing vs Referral Programs: Key Differences
| Factor | Affiliate Marketing | Referral Programs |
|---|---|---|
| How it Works | Brand partners with affiliate publishers who drive referrals | Brand incentivizes existing customers to refer friends/family |
| Upfront Cost | Minimal; only pay affiliates for conversions | Cost to set up tracking system and incentives |
| Control Level | Low; affiliates manage their own promotions | High; brands manage program rules/branding |
| Cookie Duration | 30-90 days typical | Shorter duration, often 30 days |
| Data Access | Limited to conversions; little customer insight | More customer data like email and purchase history |
| Scalability | Massive scale possible through networks | Limited based on existing customer base |
| Speed to Start | Can launch in days by joining a network | Weeks or months to build an internal referral program |
Let’s unpack some of the key differences:
- Cost: Affiliate programs only cost money when conversions happen. Upfront costs are low. Referral programs require investment in program tools and incentives before you see revenue return.
- Control: Brands have more control over messaging and positioning with referral programs. But affiliates have the audience relationships in affiliate models.
- Scalability: Affiliate marketing can scale to reach millions thanks to vast publisher networks. The size of referral programs depends on customers yours already has.
- Speed: Getting started with affiliates can be faster since the tracking software and publisher relationships already exist. Referral programs take longer to build from scratch.
As you can see, each model has pros and cons. The best approach depends on your specific business goals, audience, and resources.
Next, let’s look at some tips for setting up successful affiliate and referral programs.
How to Set Up a Profitable Affiliate Program
Follow this step-by-step guide to build an effective, mutually beneficial affiliate program:
1. Set clear program goals.
Define what you want to achieve from your affiliate partnerships. Do you want to increase brand awareness? Generate leads or sales? Expand reach into new markets? Your objectives will inform how to structure incentives and recruit partners.
2. Determine your commission structure.
Typical affiliate commissions range from 5-30%. Consider your margins, average order value, and goals when setting rates. Also decide on flat rate vs. percentage of sale commissions. Adding tiers and bonuses can incentivize top partners.
3. Establish tracking procedures.
You need to track clicks, impressions, leads, and sales from each affiliate. Tracking software handles this for you. Popular options include Refersion, LeadDyno, and Post Affiliate Pro.
4. Recruit targeted affiliates.
Search affiliate directories and networks to find publishers relevant to your niche. Reach out personally to pitch partnership opportunities. Offer custom landing pages and creatives to spearhead the relationship.
5. Provide affiliate resources and support.
Give affiliates assets like banner ads, text links, product images, and promo codes to share. Be available to answer questions and optimize campaigns together. Top programs designate affiliate managers.
6. Monitor performance continuously.
Review reports frequently to see which affiliates drive conversions and which need optimization. Adjust incentives accordingly to keep partners motivated.
Following best practices for establishing rates, tracking, affiliate recruitment, and support will help maximize returns from your affiliate channel.
Tips to Build a Highly Effective Referral Program
Use these tips to develop a referral program that encourages organic word-of-mouth sharing:
1. Offer compelling rewards.
Incentives over $100 in value receive the highest response rate. But any reward can work if framed creatively. Consider referral credits, discounts, early access to new products, VIP status, or sweepstakes entries.
Auto-populated referral invites, links, and social posts remove friction from the referral process. Tracking technology enables turnkey referral tracking and rewards.
3. Promote the program visibly.
Let customers know about the referral opportunity through emails, in-app messages, website banners, receipt print-outs, and other touchpoints. Repeat exposure drives sign-ups.
4. Gamify with leaderboards.
A little healthy competition prompts customers to share more. Leaderboards add fun by displaying top referrers. Tiers and badges for benchmarks also help.
When a big referral payoff happens, promote that story in marketing. Success stories build excitement around the program.
6. Analyze and optimize over time.
Look at referral data to see what’s working and what’s not. Adjust incentives or outreach to increase engagement. A/B test different variables.
With deliberate planning and execution, your referral program can exceed expectations. Use the learnings to refine the program over time.
Now let’s look at which option may be right for your business depending on your goals and context.
Is Affiliate Marketing or a Referral Program Better for My Business?
So when should you prioritize an affiliate program, and when is a referral program the smarter move? Here are some general guidelines:
Affiliate marketing may be better if:
- You’re launching a new product or brand without an existing customer base. Affiliates can help establish initial reach.
- You want to drive awareness and new customer acquisition more than repeat sales. Affiliates attract fresh audiences.
- You have wide profit margins to support higher commissions. Affiliates incentivize big ticket/high AOV sales.
- You want to scale distribution rapidly. The affiliate model is built for mass reach.
- You value flexibility over branding control. Affiliates take ownership of audience messaging.
Referral programs have the advantage when:
- You already have an engaged customer base to tap into. Happy customers drive referrals.
- You want cost-efficient marketing. Existing customers cost less than paid ads.
- You offer a niche product people love to talk about. Highly sharable products see natural referrals.
- You want to boost retention and repeat sales. Referrals engage customers further.
- You want tight control over branding and position. You craft the referral messaging.
Assess your specific goals, audience, and context to determine if an affiliate program or referral initiative is the right priority now. You may even run both concurrently to maximize reach and conversions.
Key Takeaways: Should You Invest in Affiliate Marketing or Referral Programs?
- Affiliate marketing and referral programs both incentivize customers to promote your brand. But the details of how each works differ significantly.
- With affiliate marketing, external partners drive referrals in exchange for a sales commission. Referral programs encourage existing customers to share with friends for a reward.
- Consider factors like cost, control, scalability, and speed when deciding between the two models. Align to your goals.
- Affiliate marketing can help launch and scale new brands rapidly. Referral programs are better for boosting retention and tapping into an established base.
- Set up tracking, offer compelling incentives, and promote the programs actively to see big returns on investment long-term.
So what do you think? Does your business have what it takes to see success with affiliates or referrals? Use the points above to decide on the right strategy for your goals and audience. Then test, track results, and refine the program over time.
