Affiliate Marketing Vs. Referral Marketing - Which One Should Your eCommerce Use?
There are many ways to approach digital marketing for brands, businesses, eCommerce stores, and B2B merchants, and it takes a lot of research to find the one that works best for your company.
In that research, you’re likely to encounter referral marketing and affiliate marketing programs. While the two are often confused, they do have distinct differences in intention, strategy, and technique. However, both can lead to notable increases and growth in revenue and customer reach.
But which one is best suited to your business? This guide to both marketing strategies will explain what they are, how they work, and provide examples of businesses that have used each effectively. It will also help you decide which option is better for you.
What Is Affiliate Marketing?
Affiliate marketing is all about the collaboration a company undertakes to boost recognition of its brand and products. It focuses on the professional relationship between an organization or brand and an affiliate i.e. an entity or individual with influence or an impact on the business’s target audience.
The affiliate marketing industry is set to be worth eight billion dollars by 2022. Affiliates can include:
- Relevant organizations
- Content marketing service providers
- Other partners
The organization establishes a performance-based marketing model that pays the affiliate to promote the brand and brand products. A popular example of this is the use of social media influencers who share paid product reviews with their followers and other users.
Benefits of Affiliate Marketing
- Increases audience reach by taking advantage of the affiliate’s customer base.
- The affiliate is responsible for the marketing efforts for that campaign, thus, it is an easy-to-manage process that requires fewer resources from the company’s marketing team.
- The audience and customers have a prior relationship with the affiliate, allowing them to trust in the promotion.
- The company can create their performance-based model depending on the metric they need to increase (ie: if registrations are low, you might pay an affiliate according to how many new registrations they bring in).
Disadvantages of Affiliate Marketing
- The brand has less control over how the affiliate shares the products, although they can indirectly influence this by providing clear marketing briefs to the affiliate.
- May generate low-quality leads.
- Often, traffic generated through affiliate marketing has low spending intentions, thus, low conversion rates.
- Affiliation with another individual or entity’s reputation and image can be a downside. Their bad press links directly to you as you are affiliated with them.
What Is Referral Marketing?
Referral marketing functions around the brand network created between your existing customers, their connections and associates, and your business. Word of mouth and good customer reviews have long been important tools for brand and eCommerce marketing, and referral marketing grows your brand along the same lines that these techniques do.
Through referral marketing, you incentivize existing customers to promote the brand with a rewards system that remunerates them for every new user they bring to the company.
Benefits of Referral Marketing
- Takes advantage of an existing customer base and their human connections.
- Leverages customer loyalty. Of course, you still need to provide the best to get this loyalty. For example, by making sure stock is available when you say it is using the best Amazon inventory management software.
- The technique is simple, easy to implement, manage, and alter.
- New customers who encounter a business via referrals are more likely to refer others.
- The business retains control of all its marketing efforts, which means complete control over its brand reputation.
Disadvantages of Referral Marketing
- Not as impactful if you do not have a large existing customer base.
- Ineffective if your product or service is still lacking in quality, as customers will not want to refer it to their networks.
Examples of Referral Marketing
Affiliate Marketing Vs. Referral Marketing - The Similarities & Differences
People often confuse these two concepts, but they certainly are different. To better note the distinctions between referral and affiliate marketing techniques, let’s take a look at the factors that make them similar and different.
1. The referral source
Both of these marketing techniques rely on social networks and the power of connections to build trust in the brand and its products. This is a similarity, of course. However, the kind of connection and the types of individuals who bring in new customers differ under each program.
Referral programs rely on word-of-mouth referrals and the networks that exist from the brand’s existing customers. The brand uses their customers as marketing agents - often, each customer has a unique code to share and each customer receives a reward for successful referrals.
Affiliate marketing is open to any individuals that generate income through brand and business promotions. This affiliate individual, then, is the referral source.
2. The program’s dissemination method
Due to the difference in referral sources, it makes sense that the sharing method will also be different.
Referral marketing relies on personalized and focused or specific contact. For example, you might enable your existing customers to share their custom code to friends via a link they can attach across varying digital communication channels, like email, social media, text, etc. This makes this approach personal and reliant on an existing private relationship.
For affiliate marketing, the dissemination approach is often more public and general. Affiliate marketers will likely post their special code or link on their website, social media accounts, blogs, etc for their audience to access. This approach relies on the influence of the affiliate as a public figure.
What is similar about the dissemination of these programs is that they can both be used repeatedly to create sustainable growth. Think about how both Uber Eats and AirBnB keep your promo code open for you to consistently share. Both methods can lead to long-term traffic and growth and drive customer engagement and loyalty.
3. The business’s relationship with the prospective customer
Clearly, each technique relies on distinct dynamics between the source and the prospective audience. Ideally, for referral marketing to work, the referral source and the customer ought to have a private or personal relationship that promotes trust.
Although trust is also important for affiliate referrals, it is more about the expertise and reputation of the affiliate marketer. There might not be a direct personal dynamic but the individual needs to have credible legitimacy to back their recommendations.
4. The reward types
Of course, both programs only work efficiently if the referral source has an incentive to actively bring in new customers for your business. The kind of reward a business offers is variable and dependent on costs and what they think would be most beneficial to the referee.
Often, however, referral programs offer discounts, gift cards, cashback, and bonuses like free ASN shipping. These rewards can be for the customer referring, the newly referred customer, or both of them.
Affiliate programs, on the other hand, generally offer some kind of cash incentive (ie: payment percentages from each sale made as a result of affiliate efforts). Sometimes, affiliates will also receive a free brand product or product discount in addition to the cash remuneration.
5. The lifetime value (LTV) of the customer
The lifetime value refers to the potential income a business can generate from a single customer over time. Customers that make one or two purchases only have low LTV and those that return consistently a higher lifetime value.
Commonly, referral programs lead to long-term customer relationships, while affiliate programs are suited to businesses that rely on shorter LTV.
Affiliate Marketing Vs. Referral Marketing - Which Should Your Ecommerce Use
Your eCommerce business should go with referral marketing if:
- Your brand already has highly satisfied and loyal customers as you can leverage them to increase the income from referrals.
- You’re more comfortable retaining control over all aspects of your brand’s reputation and marketing.
- Your brand wants to attain long-term customers and increased profits using the gross margin formula rather than short-term peaks.
- Customers love your products and services and you’re already getting a good income from referrals.
- You need an easy-to-manage marketing strategy that won’t require too many resources or funds.
Your eCommerce business should go with affiliate marketing if:
- Your product or brand’s eCommerce trends show spontaneous hikes in demand.
- Your business tends to work more towards quantity rather than quality.
- Your existing customers aren’t prone to recommending your products.
- Getting somebody else to take charge of an aspect of your marketing would be easier for your business.
- Your brand doesn’t yet have a loyal or established customer base.
Both affiliate and referral marketing techniques have benefits for your business, adding value and growth to your conversions and increasing your reach.
Depending on the direction your business wants to take regarding your goals and KPIs, your risk assessment, and the relationship you have with your customers, you can use this guide to decide which program is best for you.
One last thing to keep in mind is that you can also implement a combination of both of these marketing methods. It’s all about figuring out what your business needs and what works best so you can get your company where you want it to be.