Loyalty and referral programs are like marketing and advertising. They are used interchangeably, but there is a subtle difference.
Although they have some things in common – such as creating an immense value for the customer – they have different purposes and require two separate types of software.
Let's explore the difference between the two in more detail and see which type of program better suits your business.
Benefits of Referral Programs
If you're thinking about investing in a referral program but still don't know how your company would benefit from one, take a look at some of the key benefits of referral programs below.
- Increased brand awareness: It's simple. The more your customers know about your brand, the more it grows. And referral programs have the potential of being one of the most powerful methods to promote your brand.
- Increased conversion rates: Studies show that referral marketing can increase conversion rates by up to 70%. They help you foster relationships with customers and motivate word-of-mouth.
- Increased Customer Lifetime Value (CLV): Referral programs can significantly improve your CLV by helping you attract loyal, repeat customers who buy again and again. Building virality through referrals is a popular tactic among tech titans like Spotify and Tesla.
- Lower customer acquisition costs: Referral programs are an affordable way to leverage your existing customers to bring in new customers to your company.
- Lower churn rate: Referred customers have a 37% higher retention rate than non-referred customers. This means that you can lower your churn rate by investing time and effort into launching a proper referral program.
Benefits of Loyalty Programs
The list of benefits of loyalty programs is just as long as the list of benefits for referral programs. The top five benefits that we must mention are:
- Improved customer retention: The better customer experiences you can deliver and the more value you can add to the buying journey, the more you’ll retain existing customers.
- Repeat purchases: Loyalty programs encourage customers to return or add more items to their orders to unlock more rewards.
- Exclusivity: Customers in your loyal program may feel like they’re part of an exclusive club. Loyalty programs provide shoppers with special treatment and a feeling of belonging.
- Create brand advocates: As more than 92% of people trust word-of-mouth recommendations from friends or family, loyalty programs can be a great way to build a network of advocates. It's a two-way street: you provide them with special treatment and they spread the good word in return.
- Increase Average Order Value (AOV): It's no secret that loyalty program customers spend more $$$ per transaction. Offering rewards gives consumers a good excuse to want to spend more during their purchases.
Differences Between Loyalty and Referral Programs
Let me make a wild guess:
You've come this far into the text but are still confused about the main differences between loyalty and referral programs.
They both seem to be an affordable strategy for attracting and retaining customers, and they both offer some kind of reward to customers.
Let’s dive into a more detailed comparison.
One of the major differences between the two types of programs is their purpose. Loyalty programs are a strategy for driving repeat purchases from existing customers, while referral programs attract new customers and encourage repeat purchases.
Most loyalty programs offer rewards through point systems, rewards cards, and punch cards. Customers earn points on every purchase they make and get a reward after collecting a specific number of points.
For instance, let's say that you're a regular customer at Subway. Every purchase at the store wins you customer points that accumulate on your rewards card. After a few visits where you purchase a sub, you'll get rewarded with a free one.
On the other hand, referral programs use existing customers to promote a brand by sharing the good word to their friends and family. The referrer usually receives their reward when the referred person completes a purchase (e.g., subscribe to a paid plan). The best part about referral programs is that they can be two-sided. In other words, both the referrer and the referred receive a reward. Two-sided referral programs help you increase the loyalty of your existing customers and bring in new customers to your brand without spending too much cash on marketing.
There are different types of referral rewards and incentives. Some companies opt for cash rewards, while others offer a free subscription, brand swag, or product upgrade. The trick is to pick something that best fits your type of business.
Why Referral Programs Work
According to a 2015 report, 83% of online respondents trust the recommendations of friends and family.
The customer referral conversion rate is three times greater than the industry average of 3.64%.
Referred customers are 4.5 cents per day more profitable than other customers, while the lifetime value of referred customers is 16% higher than that of non-referred customers.
The most critical part of creating a successful referral program is choosing a reward that fits your brand. For instance, if you're a company that offers paid plans, an appropriate reward would be free access to your premium features for a limited time.
If your goal is to create traction, cash rewards may be a suitable reward. People tend to get very excited about cash incentives, and they will spread the good word around – something which is great if you're in a new or competitive space.
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One example of a successful referral program is Dropbox and their story of how they obtained 3900% growth in just 15 months.
The Dropbox referral program was quite simple: give free space to people who refer their friends and those who accept an invitation to register for Dropbox.
Their incentive was double-sided: both the referrer and the referee would get 500 MB of free space. Every new referral would get them 500 MB of additional free space, up to a limit of 16 GB.
Why Loyalty Programs Work
Loyalty programs have been around for decades, and they don't show signs of going away anytime soon.
Loyalty programs, when done correctly, help brands increase customer loyalty. And the great thing about loyal customers is that they are typically the most profitable. Over time, loyal customers become less costly to serve and can even become business builders – buying more of your products, paying premium prices, and bringing in new customers.
In essence, loyalty programs work because they make people feel like they're getting the VIP treatment. They get extra perks, get notified when sought-after merchandise arrives, and receive something for free. Because of these perks, the customer has a reason to come back and shop again.
Referral vs. Loyalty Program: Which Is Better for My Business
There are two major factors at play when deciding whether you should opt for a loyalty or a referral program: the frequency of purchase and the size of purchase.
Generally, referral programs work well with both low and high-frequency purchases. On the other hand, loyalty programs work better with high-frequency purchases, although this can depend on the type of business. For instance, buying a cup of coffee is a high-frequency purchase, whereas life insurance is a low-frequency purchase.
The size of the purchase also matters. Loyalty programs work better with low-priced purchases, whereas referral programs work well with high-priced purchases. Referral programs can also work with low-priced purchases, depending on the type of business.
|Type of Business||Frequency of Purchase||Price of Purchase||Recommended Rewards Program|
|Online Education||High/low||High/low||Referral and loyalty|
|eCommerce||High/low||High/low||Referral and loyalty|
Referral programs work better for B2C subscriptions. These typically have a frequent monthly purchase, and they tend to be affordable. Gift cards, monthly discounts, or account credits are some of the best rewards for these types of businesses.
Best for Online Education: Referral and loyalty
Referral and loyalty programs are both suitable for online education businesses. The services these companies offer may take place annually, monthly, or weekly. The price can also range from low to high, depending on the service. In general, online education services are more affordable than a one-time service. In this case, both referral and loyalty programs are suitable options.
Best for B2B SaaS: Referral
B2B SaaS solutions are growing in popularity. From CRMs and cloud storage to software for teachers and cloud-based messaging apps, they all assist businesses to operate more efficiently. Most customers can expect to subscribe to a monthly or annual fee.
The frequency of purchase and the price can vary, depending on the type of service. In other words, one B2B SaaS company can offer a service that has a low frequency of purchase at a high price, and another can offer a service with a high frequency but at a low price.
The ideal pick for these SaaS solutions would be referral programs.
Best for Financial Services: Referral
Financial service companies offer services including managing, investing, exchanging, or holding money on behalf of clients. These services tend to have a lower frequency of purchase at a higher price. The ideal program would be referral programs.
Best for Online Insurance: Referral
Online insurance companies can offer a range of services, from car and pet insurance to life insurance and estate planning. These services tend to have a lower frequency of purchase at a higher price. The ideal program would be a referral.
Best for Restaurants: Loyalty
When it comes to restaurants and coffee houses like Starbucks, loyalty programs are a better pick. Customers here generally make more frequent purchases at a lower price.
Best for eCommerce: Referral and loyalty
One can't help but think of Amazon when it comes to eCommerce businesses. This eCommerce giant has been exploding in popularity thanks to the ease of purchase but also its well-known loyalty program, Amazon Prime. eCommerce purchases can vary in both frequency and price. For example, someone may make frequent and small purchases from the same online shop, while another customer may make a one-time purchase at a higher price. Both referral and loyalty programs work.
Referral Program Software Makes Life Easier
Running a referral or a loyalty program by yourself is entirely possible, but only if you have a small number of customers. What do you do when you get thousands of customers? Referral programs are not as simple as choosing the best incentive and issuing points cards. Simple spreadsheets won't do the trick.
The fact is that referral programs involve plenty of manual work, from managing rewards to measuring results. You'll need one hell of a team to make this happen without the help of software.
These referral program software solutions will work silently in the background to automatically track referrals, send out emails, issue rewards, promote your program, and more. You don't need a big team to manage the program. You only need a few good people to keep an eye on the processes.
Similar to how the two types of programs differ, the software to run them also comes with program-specific functionalities. Although they may have some overlapping features, they will be tailored to each type. So, if you're thinking about running a referral program, get a specialized software for that purpose. The same thing applies if you're going for a loyalty program.
Throughout this post, we've been focusing on the major differences between the two types of programs. As a closing thought, it's important to mention the similarities, as well. For one, both programs create immense value for the customer and can help your brand build long-lasting relationships.
- Loyalty and referral programs are like marketing and advertising . They are used interchangeably, but there is a subtle difference.
- Both programs are an affordable strategy for attracting and retaining customers, and they both offer some kind of rewards to customers.
- One of the major differences between the two types of programs is their purpose. Loyalty programs are a strategy for driving repeat purchases from existing customers, while referral programs attract new customers and encourage repeat purchases.
- There are two major factors at play when deciding on whether you should opt for a loyalty referral program: the frequency of purchase and the size of purchase.
- There are rewards program software specializing in referral programs and software solutions specific to loyalty programs.
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