Referral Programs vs Customer Loyalty Programs: Differences

Ever since it’s played a commanding knock in the launch of brands like Tesla, Dropbox, and Airbnb, referral programs have been making waves in the business world as the most potent marketing strategy.

Tapping viral growth, attracting high-quality leads, or increasing sales, there’s a lot a refer-a-friend campaign can do for your business but it’s not the only marketing tactic at your disposal.

If you are willing to turn your local brand into a global enterprise, perhaps synergistic partnerships with other businesses and fostering loyalty among customers can help broaden your scale. That’s where loyalty programs are good at.

From a consumer’s perspective, loyalty programs look much like a referral campaign considering they also use incentives to engage customers long-term. But for a business, there’s a thin line between the two. Read on to learn the difference between loyalty and referral programs and what suits your business better.

What is a Referral Program?

A referral program, often referred to as a refer-a-friend program, is a marketing strategy set to motivate a brand’s existing customers to brand advocate for its products or services in hopes of attracting new ones on board. Friendly recommendations hold prevalence over any kind of marketing - and that’s what favors word-of-mouth marketing.

A good word from a friend is likely to influence 92% of consumers’ purchase decisions. People who have a positive experience with a brand are more likely to share the referral and spread the word to others, creating a ripple effect that drives in new customers.

To compensate for their efforts and encourage existing customers to recommend for brand awareness, the company rewards customers with special incentives that ascribe to the only marketing cost.

Benefits of a Referral Program

The programs aim is to help you establish a flourishing customer base. In case the referral success stories aren’t convincing enough, here’s a breakdown of what a referral marketing program can do for your business:

Higher customer acquisition: People are more likely to trust and act on a friendly recommendation over a paid advert, which makes word of mouth a primary factor in convincing potential customers to jump aboard. Referred customers prefer recommendations over online reviews.

Lower marketing costs: While typical marketing practices thrive on hefty budgets and operational costs, referral marketing only requires an enthusiastic audience to turn customers into loyal advocates.

Tap exponential growth: You don’t know who your customers will refer you to within their networks. A single referral can lead to multiple additional referrals, creating a chain reaction that can rapidly expand the customer base.

Top Customer Referral Program Example to Look Up to

The potential of referral marketing is quite evident from the success it has brought to startups and million-dollar enterprises alike. We’ve shared brief insights from a couple of them to help you derive inspiration for your own campaign.

Dropbox

Launching a SaaS product into a crowded marketing and building a million-dollar business out of it, can never be done more impressively than Dropbox. In 2008, Dropbox was the first to launch a reward program in the SaaS industry and leveraged firstcomer advantage to the full.

What’s remarkable about Dropbox’s campaign is that it spent zero dollars on the referral rewards but rather resorted to something in-house. With each successful referral, customers would receive 500 MB of cloud space.

By offering something that inherently links to the business, allowed Dropbox to retain customers and attract an interested audience without suffering a dent in its marketing budget. The company achieved 2.8 million signups on its platform accounting for 3900% growth.

What is a Customer Loyalty Program?

While referral programs are meant to get new customers, loyalty programs focus on establishing relationships with customers. It’s an attempt to foster customer loyalty in a company’s existing clientele and oblige them to keep purchasing from your shop long-term.

By definition, a loyalty program is a marketing strategy designed to cultivate loyalty and maintain continuous engagement with customers by offering rewards for any action that ties them to your brand.

The core of any loyalty program is its reward system. Customers earn rewards or loyalty points for various actions such as repeat purchases, referring friends, or social media shoutouts. The earned points are tracked by their loyalty cards and can be redeemed for in-store discounts, free products, or exclusive access to premium features.

Benefits of a Referral Loyalty Program

Sure, a constant inflow of new customers is elemental to business growth but you cannot underestimate the importance of loyalty. Loyal customers not only provide a stable source of revenue but also serve as brand ambassadors, spreading positive word-of-mouth and drawing in new customers through their recommendations.

A loyal customer base or loyalty members can be your shield against market volatility. In times of economic uncertainty or fierce competition, it's the loyalty program members who stand as a bulwark, ensuring your business remains flourishing. Here are some additional perks of adopting a loyalty program for your business:

• Increase customer lifetime value: It goes without saying that a loyal customer will stick longer with your brand which ultimately accumulates into frequent purchases and an increase in sales revenue.
• Generate new referrals: Loyal clients are naturally driven to share their positive experiences with their friends and family, who in turn inherit their trust and loyalty and engage in sales right off the bat.
• Maintain healthy profits: Apart from frequent purchases that add up over time, loyalty programs incentivize customers to engage in larger transactions. Reward your customers who share referral links to encourage loyalty. This allows companies to attain healthier profits during and after the launch.

Top Loyalty Program Example to Look Up to

Keeping a loyal customer base is tough when there are rival brands ready to jump in your place with killer products and competitive price tags. You need a loyalty program in your ecosystem to keep your clients at bay. Give them a sense of exclusivity or VIP status among others so they know they are valued under your banner throughout the customer journey. Here’s what the world’s leading coffee chain does to retain its customers.

Starbucks

A Starbucks cafe in almost every corner of the world vouches for its brilliant taste but what keeps them running is a loyal, dedicated userbase. People love Starbucks enough to make it a part of their daily routine. Apart from the accustomed tastebuds, it is the Starbucks loyalty program that encourages customers to spread the word and keep coming back for more.

Upon joining the loyalty program, customers immediately start to earn a star for every dollar spent at Starbucks. The points get accumulated in the digital Starbucks card, which can be used as payment for the next purchase. 25 stars can get you a free beverage while 50 stars can set you up for a brew and baked item.

Loyalty Program vs Referral Programs: Outlining Differences

If you’re just here for an overview, don’t need to leap further into the text. The comparison table below showcases the differences between the two marketing strategies:

Loyalty and Referral Programs: What Suits Your Business?

On the outlook, both marketing programs look profitable but is it the same across all industries? If you’re still pressed on what route to take, here’s how you can figure out the right strategy for your business:

• Review your customer lifecycle: Figure out where your business is at in terms of its growth journey. If you're a startup or in the early stages, customer acquisition might be your priority. If you have an established customer base, you may want to focus on retention.
• Think about your product niche: The nature of your products or services can influence your decision. If your offerings are one-time purchases, a referral program might be more suitable. If you offer subscription-based services that require continuous and frequent purchases, a loyalty program to help can give customers assurance and enhance retention.
• Keep the price tag in mind: What’s the average order value of your customers who made a purchase? If they are spending more on your products but rarely so, keeping a constant flow of customers would matter more. But if the order value is low, like in an ecommerce business, you may need to set in a loyalty program to ensure a constant revenue stream.
• Consider a hybrid model: It's not always an either/or choice. Some businesses like Airbnb successfully employ both referral and loyalty programs. A referral program will keep customers coming back, while loyalty programs help keep them engaged.

Closing Note

Planning and running a referral program may seem like a project worth tackling in-house during the earlier stages of your startup. Of course, it’s one way to limit your marketing expense but what happens when you hit the right cord and leads start to roll in masses?

Keeping things seamless under such a load can be a backbreaker and may put your brand trust in jeopardy. No matter what program you run, there’s a lot of behind-the-scenes mess to tackle which requires specialists on the job. Choose Prefinery.com - a marketing platform that can make your loyalty and referral programs work simultaneously while you focus on more pressing issues.

FAQs

How do I decide which program is best for my business?

The right choice depends on your business goals, product niche, and the customers you’re targeting. Implement a loyalty and referral program that best aligns with your objectives, entertains your target audience segment, and is appropriate to your budget.

Can a business implement both referral and loyalty programs simultaneously?

Yes, many businesses combine elements of both programs to create a comprehensive customer engagement and growth strategy. For example, a business may use referrals to bring in new customers and then use a loyalty program allow to keep those customers engaged, ensure customer satisfaction, and incentivize repeat purchases.