Referral Program vs. Affiliate Program: What’s The Difference?

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Business owners and marketing teams often have complex mazes to navigate and difficult decisions to make. 

Although the global ecommerce market reached $4.9 trillion in 2021 and is expected to reach $7.4 trillion by 2025, teams are usually working on set budgets and have to decide where best to allocate those funds. 

Multiple channels and platforms, traditional advertising and other options - the decisions can be hard to make. Two types of marketing that have seen increasing popularity in recent years are referral programs and affiliate programs.

Referral Program vs. Affiliate Program What's The Difference

Many people get the two confused and often see them being the same as one another, but that’s not the case. 

So, what are the differences between them? What benefits do they offer to your ecommerce business and how do you decide whether to adopt one or both? We take a look at both so you can make easier decisions.

What is a referral program and how does it work? 

What is referral marketing?

You could think of referral marketing as the digital version of word of mouth marketing.

What is referral marketing

It is when you actively encourage your existing customers to promote and refer your business to friends and family (and other people), usually in order to earn rewards from the company they are promoting. 

The primary difference between referral and affiliate marketing is that a referral marketing program relies on a more personal level of interaction:

Mr B is happy with the goods and support offered by Company C so he is happy to recommend that company to people he knows. 

How do referral programs work? 

At the heart of any good referral program lies the idea of incentivizing the actions taken by customers when recommending your organization.

The reason these programs work so well is that people trust word-of-mouth recommendations from friends or family. This makes referral programs a marketer’s dream. 

The actual machinery of referral programs involves you (as the ecommerce business) providing an existing customer with a referral link (or in some cases, a unique code) that the customer can pass on to their friends and family.

The link or code will then allow you to see how much custom that person has generated through sharing said link or code. 

Benefits of referral programs

Why choose a referral program? There are several benefits that can come from using word of mouth marketing as part of your overall marketing strategy.

Benefits of referral programs

Those include:

  • Cost effectiveness: Put simply, referral marketing may be the most effective tactic you can employ. When it comes to ecommerce analytics, one of the most important metrics is customer acquisition cost (CAC). Customers who come to you via a referral program represent lower acquisition costs as you have not had to spend to acquire them.
  • Higher value: Starting from the original referrer, CLV (customer lifetime value) tends to be higher for these customers. As soon as Mr B refers Mr C, then Mr B’s value automatically increases to your organization.
  • Better customers: Not only do referred customers usually have higher value, they tend to be of a better quality than customers you acquire via traditional methods. If they come to your company on the recommendation of a friend or family member, then there is already an initial trust based on that referral. 
  • Maximize sharing: In ye olde days, word of mouth could be a fairly limited tool. With multiple online channels and platforms, the potential for a customer to recommend you today is maximized. Posting reviews and user generated content (UGC) also means that you have costless resources to share, too.

How to incentivize 

As mentioned, referral reward schemes and incentivization lie at the heart of successful referral marketing.

How to incentivize

After all, you want to encourage your customers to refer as many people as possible.

If you are selling a call center as a software service, every new customer can be very lucrative to you, so you want people to have a reason to make referrals.

Incentives can take different forms and can be tiered in relation to how many referrals are made. Rewards can include:

  • Discounts: Offer your referrers discounts on future purchases. A win-win for you as the sale comes to you anyways. 
  • Free products: You may give away specially branded items (for example, golf umbrellas) that promote your brand or give them products that are overstocked or not selling well. 
  • Cash or cash back schemes: If choosing cash-related incentives, always ensure both parties (referrer and referred) are rewarded. 
  • CSR (corporate social responsibility): CSR is more than just good PR, it can also help charities in need and lead to a feel good factor for all involved. 
  • Free subscriptions: If you have subscription options on your site, then offering a free period as a reward can also lead to the customer paying for a subscription later.
  • Gift cards: Similar to discounts as the sale ultimately comes to you, gift cards can also be given as presents. You can make the gift cards time-limited so you know when you have the revenue back.

What is an affiliate program and how does it work?

What is affiliate marketing?

Affiliate marketing is when a business or individual is advertising and promoting your products and receiving a commission for each sale or lead they generate. 

These businesses/individuals are called your affiliates and they will do most of the work themselves (though you may provide promotional material). 

Commission is paid for a number of possible actions. As well as sales, you may also pay commission based on impressions or clicks.

For some businesses, they want to pursue the sale themselves (for example, where a service is complicated or specialized) and having affiliates sending people to you acts as a solid form of lead generation. 

How do affiliate programs work? 

Your affiliates are very rarely actual customers. They can be other businesses, bloggers, and brand ambassadors. While referral rewards can consist of the different types listed, affiliate rewards are nearly always cash

Commission may be paid on a per-sale or per-click basis, or they may be paid as a recurring percentage (for example, for subscription-based SaaS products).  

While your affiliates do not need to be customers, in most cases they do need some sort of affinity or connection with you or your products.

For example, if you manufacture sports shoes, then it makes sense to have an affiliate who sells sportswear online. Affiliate relationships are ones that offer mutual benefits so an affinity makes good sense. 

Benefits of affiliate programs

Establishing a good (and effective) affiliate partnership is something that offers benefits both to you and to your affiliate.

Benefits of affiliate programs

The best affiliate marketing programs boast three main benefits for you both:

  • Low costs: For brands, there is no requirement to invest anything in your affiliates. In some cases, you may provide them with existing marketing material and you may choose to vet anything they produce themselves. In most cases, it is almost 100% hands-off.
  • For the affiliate partner, they can start with something as simple as a WordPress site or even a Facebook page. They can invest as much or as little as they want (or can) to get started and then grow to success. The only thing they really need to invest is time.
  • Low risks: Startups and smaller brands are very conscious of risk; both financial risk and also the risk of damaging brand awareness. As affiliate programs are low cost, the former is covered well. For the latter factor, it is down to choosing affiliate partners carefully so you avoid such risk.
  • For your partner, they already know that their main investment is time and that there is little financial risk if they proceed carefully. Their primary focus is on their links and how they promote you, and as they are self-employed, there is little risk in that area either.
  • Scalability: You want your business to grow, that’s just normal. Affiliate programs offer you the opportunity to grow without the usual risk. As long as you can continue to supply and increase the demand for your products, you have scalability without risk and with minimal costs.
  • Scalability is easy for your partners, too. They may start off promoting a small number of products and services but as their trustability and reach grows, they can expand and scale upwards. For example, maybe they write a marketing blog and feature subjects such as how to plan affiliate marketing. As their readership grows, more companies will be interested in partnering with them.

The takeaway

Deciding on which type of strategy best suits you is something for careful consideration. And, as a popular internet meme suggests, ‘why not both?’ 

The takeaway

Both types of marketing can be low cost and require little effort on your part. 

You may even choose to delegate some of the related tasks to software and automation as there are some great programs available, including efficient affiliate marketing software

Both affiliate and referral programs can be hugely beneficial to your business, whether you are a new ecommerce organization or an established one. For more information, check out affiliate marketing for e-commerce.

Weighing up the differences between them and how each fits with your current business model and plans can go a long way to helping you decide which to choose.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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