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Affiliate vs Referral Programs: Which is best for your brand?

Posted by Kevin Yun | Aug 30, 2021

Affiliate programs and referral programs are powerful customer acquisition strategies that tap into your business' word-of-mouth growth potential.

And although affiliate and referral marketing share the same goal of getting referrals through incentives, they target different audiences with different types of rewards.

Here's a quick breakdown of the differences:

Referral Programs Affiliate Programs
Rewards Non-cash (gift cards, coupons, account credits, swag) and cash rewards Cash (percentage of sales)
Reward recurrence Usually one-off Payouts (typically monthly)
Partner type First-party (your users, customers) Third-party (affiliate marketers)
Partner channels/reach Friends, family, colleagues Affiliate circles, ad networks
Logistical hurdles Provide partner with unique referral link to share Provide partner with unique referral link to share, and collect tax forms

What's an affiliate program?

An affiliate program is when you leverage third parties (any person or organization) to refer you new customers. The reward is typically a recurring cash payout.

These partners (called affiliates) can be any third party (person or organization, but more commonly individual marketers) that refers you with potential leads. Once leads convert into customers, you would provide the affiliate with a kickback of the revenue made from the sale.

If you want to provide a referral reward based on commission, chances are you want an affiliate program.

Example: You provide 20% sales commission for every lead in a trial period who successfully converts into a paying subscriber. You pay out this commission every month to the affiliate, until the paying user cancels their subscription.

Aazar Shad has a great Twitter thread on how to do affiliate marketing:

What's a referral program?

A referral program is when you leverage your existing customers/users to refer you new customers. The reward is typically a discount, account credits, or any other incentive that is related to your product/service. Like an affiliate program, the reward can also be cash.

There is a high probability that some of your customers/users are already sharing your product/service with their friends and family. Generally speaking, your customers are typically greater advocates for your business than affiliates, as they are are the warmest connections for your new leads (their friends/family/colleagues), and thus the chance for conversion is higher, and the chance for churn is lower (stickier customers).

When the reward for your referral program hits the motivational sweet spot with your audience, you unlock a highly sustainable, cost-effective acquisition strategy for your business.

Example: The Dropbox referral program is recognised as one of the most successful referral systems. Their incentives are widely appreciated by the user base and participants. Their two sided incentive program offers rewards for both the referrer and the referred user.

These rewards are increased depending on the level that the referrer is subscribed at. For example, Dropbox Basic accounts get 500 MB per referral and can earn up to 16 GB in total referrals. Dropbox Plus and Professional accounts get 1 GB per referral and can earn up to 32 GB.

Dropbox referral program

It is unusual for a referral program to cap the number of referrals that someone can make, but if someone is making that many referrals it opens opportunities for Dropbox’s internal team to reach out to them. Those that cap out are likely good candidates to become brand ambassadors.

What's the difference between an affiliate program and referral program?

The simple way to differentiate between a referral program and affiliate program is asking yourself what is the incentive? If the reward is cash, it's most likely an affiliate program.

However, it should be noted that sometimes an affiliate program can be the same as a referral program (e.g, when cash is the reward, your customers also become your affiliates).

This is often too simplistic a method of differentiating between an affiliate program and a referral program. There are some differences that are more clear cut:

Who is doing the referrals

With affiliate programs, there is a chance that the person sending the customers to your business hasn’t even been a customer of yours. They are simply looking for opportunities to monetize their work. This is often the case with bloggers, take for instance a food blog, they may not have used some expensive cooking tools but are able to embed links to them and potentially earn a cut of the commission after a purchase.

A referral scheme will usually target customers who already have a direct connection with the business. They might have been customers in the past and are likely to still be active customers with the business at the time of participation. They will be given a unique code or link to use.

Connection between referrer and new customers

Affiliates, through the nature of their platform, are often promoting your product or service to people they have no direct connection with. These people are part of the organic traffic that comes through to their website, such as blog readers or those researching new products to purchase.

Conversely, rather than promoting it on a specific platform, referral program participants will share their link or referral code with their known network, such as friends and family. This is how referral marketing is often closely linked to word of mouth marketing.

How it is shared

The general line is that referral programs take a bit more effort to share. The participant has to actively share their code with their network of friends and family. An affiliate, on the other hand, will have to make a great deal of effort building their platform in the first place but will then be able to rely on relatively passive commissions once they have enough traffic.

It is worth noting that referral program success rates are considerably higher than affiliate programs. This is because there is a far higher level of social proof and emotional marketing happening naturally. People tend to have a much higher degree of trust in recommendations from friends and family than they do from something they read online.

The rewards for participants

Referral programs often keep the rewards internal and offer things like free months, discounts or credit. Affiliates, often being one sided with their incentives, offer a commission like cash reward to the referring party.

How are affiliate programs and referral programs similar?

There are, as noted above, many differences between affiliate programs and referral programs, but there are also similarities.

Leveraging Existing Customers

Both types of programs will spend a great deal of their marketing budget reaching out to their existing customers. The happy customers amongst their user base are far more likely to; want to participate at all, talk positively about the products, network with others who are similar to them and therefore share similar buyer personas, and look fondly upon an incentive program.

Investment of Social Currency

Social currency is based on the level of trust that is passed on with a referral. People, whether acting as a referrer or as an affiliate, are staking their personal reputation on the line. This creates an element of risk for the participant but passes on a great deal of kudos to those who are being targeted.

On the face of it, it might seem that there is less trust involved with an affiliate scheme, but even though there aren’t any individual conversations taking place, new customers are still having to click on and follow external links. This takes a degree of trust.

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Scalability

Referral programs and affiliate programs are both inherently scalable. The best referral programs, especially those that make use of automated software, will scale alongside the number of participants. For companies working in the SaaS industry it is only the company’s capacity for customers that might be the limiting factor.

Affiliate programs can scale in terms of the number of affiliates taking part in the program (with their individual audiences) and also the amount of traffic that each individual affiliate generates. Affiliate software makes it easier to manage and scale affiliate revenue.

Referral vs. Affiliate Program: Which Is Better for My Business

There is often a balance to be struck between referral programs and affiliate programs, and many businesses will find that a combination of both will work well for them. If a straight decision needs to be made then it is often down to the actual purchases that are made. It depends on how often that purchase is made and also the cost of the purchase.

Many affiliate programs work well on individual products such as courses or high ticket items. This is why you often see blogs titled “The best x [product] on the market” with links to one-time, high value purchases. This is because people will read these articles during their research part of the buying process.

Referral programs are successful when targeting purchases that are made both frequently and infrequently. A program such as Uber might be used regularly by the participants and referral rewards can accrue quickly. A referral program from an annual subscription such as insurance, will often work as well especially with the correct incentive offered.

Type of Business Frequency of Purchase Price of Purchase Recommended Program
B2C Subscriptions High Low Referral and affiliate
Online Education High/low High/low Referral and affiliate
B2B SaaS High/low High/low Referral
Financial Services Low High Referral
Online Insurance Low High Referral
eCommerce High/low High/low Referral and affiliate
Restaurants High Low Referral and affiliate

Best for B2C Subscriptions: Referral

B2C subscriptions are prime candidates for referral programs. The users that have a high level of satisfaction with the service being provided are excellent participants in these programs and will often go above and beyond, especially in exchange for incentives such as free months or discounts.

Affiliate programs can often work well too, but without the same level of social proof there are likely to be fewer successful signups. Many affiliates will write pieces comparing different subscriptions on offer, often with affiliate links for each business, increasing the level of competition.

Best for Online Education: Referral and affiliate

Many courses are offered with payment taken on a monthly, annual or one off basis. Referral programs work well for courses without a defined end, such as a language learning course. Affiliate programs have success working with high ticket courses paid for in one go, such as the various eCommerce or marketing courses offered by digital marketing gurus.

Best for B2B SaaS: Referral

B2B SaaS is the perfect fit for referral programs. With regular purchases taking place there are many opportunities for those participating to bring in extra customers and benefit from the incentives offered. Many B2B SaaS companies will offer a program with a tiered incentive position where referrers are able to increase their rewards as they bring in more and more customers.

Best for Financial Services: Referral

When it comes to financial services, people require a very high level of trust before going ahead and making a purchase. The increased social proof and trust included in a referral program make them a perfect candidate for the financial services.

Best for Online Insurance: Referral

Following the same logic as the financial services, online insurance works great with referral programs. Blind affiliate programs will have a far lower degree of success.

Best for Restaurants: Referral and affiliate

Physical referral programs, such as discount codes, will work well for the restaurant industry. That said, with the advent of large platforms such as TripAdvisor and Yelp there is definitely a place for affiliates to make a set commission per booking (for instance) that is made through a link they can provide.

Best for eCommerce: Referral

As mentioned at the start of this article, Amazon is one of the biggest providers of affiliate commissions and there are hundreds of thousands of eCommerce sites that offer similar programs. The vast majority of eCommerce sites will lean towards affiliate marketing, seeing as there is little needed for them to manage but those looking for the greatest levels of growth will run both programs side-by-side.

To keep on the example of Amazon, in order to bolster numbers for their Amazon Prime subscription program, they run a referral program where participants will receive credit when a new member signs up and makes a purchase.

Key Takeaways

There is a place in most marketing strategies for a referral program and an affiliate program. The key is making sure that they work for you rather than creating work for you. Thankfully there are platforms that make the automation of referral programs simple, why not give GrowSurf a try today with a free trial.

  • Affiliate programs target anyone reading. Referral programs rely on relationships.
  • There are both differences and similarities between affiliate and referral programs, understanding what they are is key to success.
  • Consider what you are offering before deciding on a program.

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