Affiliate Marketing vs Referral Marketing

Affiliate Marketing vs Referral Marketing? Both are popular marketing strategies for driving customer acquisition. However, they operate differently.

The primary difference between affiliate and referral marketing lies in the approach: affiliate marketing relies on external brand advocates to direct customers to your business in exchange for a fixed fee. Conversely, referral marketing centers around incentivizing existing customers to encourage their friends to experience your product or service.

There are 06 key differences between affiliate marketing and referral marketing:

The partners of the business
The essence of the business-partner relationship
Reward Structure
Program Complexity
Upfront Cost
Medium of Share

Then, we will give you data-based insights to see which model is more suitable for your business.

affiliate-marketing-vs-referral-marketing-00

1. Referral Marketing

1.1. What is Referral Marketing?

Referral Marketing (also known as word-of-mouth marketing) is a form of marketing in which current customers – people who love your products/services – will recommend that product to friends and family members.

Well, imagine you get a product recommendation from one of your family members, would you at least have a check on it?

Probably, huh?

That’s why referral marketing is effective. Over 90% of people believe referrals from people they know and they are 4 times more likely to buy, compared to a normal referral.

With referral marketing, you don’t need to pay customers to promote your brand. Instead, you can reward them with promotional codes, free products or points, etc. Bonuses are the best way to encourage your customers to join the campaign.

Referral Marketing can help increase sales 5 times compared to regular advertising. Thanks to its effectiveness, the conversion rate from Referral Marketing is 30% higher and the customer lifetime value is 16% higher than other advertising channels. Referrals from friends and relatives will be more trustworthy and the customers a business gets from this way have a high chance of becoming loyal customers of the business.

1.2. How does referral marketing work?

Here’s how referral programs work:

Business incentivizes existing customers (advocates): They offer rewards like discounts, free products, or points for referring new customers.
Advocates share referral links or codes: They spread the word through social media, email, or word-of-mouth.
New customer uses the referral link/code: When they sign up or make a purchase, the referral is tracked.
Rewards for both: Both the advocate and the new customer receive their promised rewards.

Referral Marketing incentivizes customers to become brand ambassadors, driving organic growth and building brand loyalty.

And it is one of the best ways to promote your business without spending a huge upfront cost.

1.3. Costs of Referral Marketing

Referral marketing is not an expensive strategy to start. However, it also takes additional intangible costs like time, effort, and opportunity costs.

Let’s consider the cost below:

Overall Cost: Please note that the budget for referral marketing should be lower than your business marketing budget. Ideally, the number is 5-6%.
Referral rewards and incentives: Discounts, free products, or points awarded to both advocates and new customers. This is the biggest share and takes around 70% of the referral marketing budget.
Program Promotion: Promoting the program through email, social media, or influencer partnerships. You can simply zero-cost promote via email and social media but can also buy PR posts which start at $50.
Set-up: Companies use platforms/software to manage referrals, track links, and automate rewards. Cost varies based on features and scale. Typically, it can range from $20 to $200 for a month. The price depends on the software you are using but not your business scale. BixGrow offers a monthly plan at a price that is equal to your lunch.
Time and human resources: A referral program of a medium business will take 4-12 working hours a week, just to maintain relationships and track the performance of the brand’s advocates.

There is one common mistake of business owners that they only have to prepare a budget for rewards. However, the cost of referral management could add up and become enormous, which may include: design marketing materials, automation email, and affiliate performance tracking. A third-party app is recommended.

1.4. Example of referral marketing

Airbnb’s “Refer a Friend, Get Travel Credit” program is a legend when we talk about referral marketing.

The campaign was launched in 2010 and allows existing Airbnb users to earn travel credit by referring friends to join the platform. Both the referrer and the referred friend receive credit after the friend completes their first stay (minimum booking value applies).

All the user needs to do is promote a limited-time offer with a simple referral link. The referral link is highly personalized. User preferences and travel interests, increase relevance and conversion rates.

Airbnb credits its referral program for driving 20-30% of new user signups, significantly contributing to its user base growth.

2. Affiliate Marketing

2.1. What is Affiliate Marketing?

Affiliate marketing has a similar operating mechanism to referral marketing.

However, the subjects participating in your strategy can be merchants, affiliates, and customers. Affiliates will help you promote and sell, and the business will pay cash to participants.

Simply saying, your business pays affiliates to sell your products to others. Affiliates and suppliers are not necessarily your customers. Their only motivation is to sell or promote your product and receive a commission in return. If your business is having difficulty selling, you can partner with another unit to help you and you pay them a portion of their income.

See more: Digital Marketing vs Affiliate Marketing: A Comparision

2.2. How does affiliate marketing work?

Here is a short explanation of how affiliate programs work:

A business creates an affiliate program: They want to promote their products or services and are willing to pay a commission to others for doing so.
The brand provides the affiliates with tracking links: These links or codes allow the brand to track which sales came from the affiliate’s efforts.
Affiliates promote the advertiser’s products or services: This can be done through a variety of methods, such as blogging, social media, email marketing, or even creating their own websites or YouTube channels.
Earn commission: When a customer clicks on an affiliate link or code and makes a purchase, the affiliate earns a commission. The amount of the commission is typically a percentage of the sale price of the product or service.

See more: 09 reasons Affiliate Marketing is booming in 21st century!

2.3. Costs of Affiliate Marketing

Affiliate marketing is a cost-effective way to boost sales with a 1,400% return on investment rate.

While it’s true you don’t have to pay upfront fees like traditional marketing, there are hidden expenses to consider. Don’t be fooled by the “pay only for results” promise – running a successful program involves more than just handing out commissions.

Budgeting for affiliate marketing is as follows:

Overall Cost: The budget for affiliate marketing ranges from 5-15%. Most companies keep it hovering around 10% and some push it to 30%.
Affiliate Commission: A commission rate typically ranges from 5%-20% of the product price. The amount of commission payout is often calculated as a part of a marketing campaign.
Program promotion: Social media ads, and email marketing campaigns all cost money.
Set-up cost: Affiliate networks charge a commission on each affiliate sale, while affiliate apps/SaaS charges a fixed monthly fee. With affiliate marketing apps, the prices for affiliate management are typically higher than those of referral programs. It could range from $20-$500.
Time and human resources: With automated affiliate marketing software, a small business can maintain an affiliate by less than 10 hours a week. Bigger companies with thousands of affiliates, need an affiliate manager or even tens of team members just to communicate and support affiliates.

Remember, affiliate marketing is an investment, not just an expense. While there are upfront costs, a well-run program can deliver a significant return on investment through increased sales, brand awareness, and loyal customers.

2.4. Example of affiliate marketing

The Amazon Associates Program is a prime example of how referral marketing can be used effectively to drive sales and brand awareness. Amazon’s affiliate marketing network, Amazon Associates, is the biggest network worldwide with over 900 thousand affiliates in 2021.

So how does it work?

Affiliates: They focus on people with a strong online presence. Anyone with a website, blog, or social media account can join the program for free.
Rewards: When someone clicks an affiliate link and makes a purchase, the associate earns a commission (typically 4-10% of the sale price).

The main reason for its success is that Amazon is the most popular and credible online retailer in the world. People approach this brand’s promotional products with very little trust issues. Plus with millions of products across various categories and a global reach, the Amazon program is basically for everyone.

Therefore, even offering a lower commission rate than average, the Amazon Associate Program is still lucrative for both affiliates and the company. The company reportedly generated over $8.5 billion in revenue from the Associates Program in 2022.

See more: Affiliate Marketing and Influencer Marketing: A Comparision

3. Key Differences Between Affiliate Marketing and Referral Marketing

3.1. Partner of businesses.

Affiliate marketing: As mentioned, people who participate in promoting and selling products for businesses through Affiliate marketing do not necessarily have to be your current customers. They can be freelancer marketers social media influencers or even normal internet users.

Plus, businesses can also participate in another business affiliate program.

Referral Marketing: Referral Marketing works based on referrals and shares from friends to people around them. Referral Marketing has a high level of trust, potential customers are more easily influenced and can become loyal customers of the business.

3.2. Relationship with Business

Affiliate marketing: The relationship between the affiliates and the business is often transactional. Their connection is based on financial opportunities rather than a deep personal or emotional tie. Affiliates may work with multiple businesses simultaneously.

Referral Marketing: Referral marketing requires strong connections between the business and its existing customers or advocates. The connection in referral marketing goes beyond financial transactions. Advocates feel truly attached to the brand and get motivated by their satisfaction with the product or service.

3.3. Reward structures

Affiliate marketing: The most commonly used form of reward is cash or a percentage of commission. For celebrities/influencers, they will sometimes receive products to promote or give away to their viewers.

Referral marketing: The form of rewards is more diverse, it can be store credit, free products, refunds, or vouchers,…

3.4 Program Complexity

Affiliate Marketing: This can be more complex. It involves link tracking and performance reporting for every single affiliate. Plus, because the brand has a high number of affiliates with mixed promotion methods, managing a network of affiliates could be a tedious and complex task.

Referral Marketing: Often simpler to manage, with a focus on encouraging and tracking customer referrals. Working with referrers can be more pleasant as both sides already know about each other in advance, and have built a well-established truth. Additionally, the number of referrers is lower.

3.5. Upfront cost

Affiliate marketing: The cost can include affiliate management and commission payouts. Affiliate marketing ensures revenue for the companies, as long as the commission does not exceed the business’s marketing expense. Affiliate marketing tends to have higher direct upfront costs due to commission payments to affiliates.

Referral marketing: This cost includes affiliate management and rewards. Referral marketing can be more cost-effective, especially if the rewards are non-monetary or if the program is promoted through cost-effective channels.

A cost-effective channel could be an invitation email to sasitified customers, or a post-purchase invitation.

3.6. Medium of shares

Affiliate marketing: Products and services will be shared via a dedicated business website or posted on social networks. Another way is that promoters will tag, and hashtag the business, or sell products right on their page.

Referral marketing: Each customer has their own personal link or coupon, which they share or message to their friends. The content that customers can share with people around them can be introductions to gift cards, offers, discount codes, or their experiences with products, etc.

A coupon or gift card for a customer could be highly personalized, such as adding the customer’s name to the code/gift card. Here are the examples:

4. Affiliate Marketing vs Referral Marketing: which is more effective?

Affiliate marketing and referral marketing are two popular strategies for online businesses to attract and retain customers. But which one is more effective?

Well, it depends on your niche of business and its goals.

If your goal is just to sell products, you can choose Affiliate Marketing, but if your goal is to increase conversion rates and get the most loyal customers possible, use Referral Marketing.

Here are data for a better understanding of which model is more suitable for your business.

	Referral Marketing	Affiliate Marketing
Average conversion rate	1.5% to 5.5%	0,5% to 1%
Average Return on Investment Rate	30:1	14:1
Maintainance Cost	$20-$200	$20-$500
Average share of overall marketing budget	1-5%	10%

Please note that the numbers are all calculated averages. The rate and expense could vary dramatically depending on your niche of business.

For example, industries like e-commerce and travel heavily rely on affiliate marketing and may allocate up to 30% of their budget to it.

5. Referral Marketing And Affiliate Marketing – which one is suitable for your business?

Depending on the type and goals of your business, you will have different options.

We recommend both! But there is definitely to focus on. Here are some additional factors to consider:

Industry: Industries targeting a broad customer base such as e-commerce heavily rely on affiliate marketing. Meanwhile, narrow niche like SaaS benefits more from referral programs.
Product maturity: New products might benefit from a wider reach of affiliates, while established brands can enhance customer loyalty via referrals.
Marketing goals: If brand awareness is a priority, referrals might be better, while sales-driven goals might favor affiliate marketing.

If you want to use referral marketing to attract customers and freelance affiliates, BixGrow can help you find the most suitable solution. A few highlights of the BixGrow Affiliate and Referral Marketing Features.

Omnic-channel and the lifetime tracking link
Fully customizable affiliate and referral portal
Flexible commission structure
Automatically invite customers to become brand ambassadors
Diverse product lines and reward setups.

Contact BixGrow for advice on effective Affiliate Marketing solutions for your business.

Affiliate Marketing vs Referral Marketing – The differences