Affiliate vs Influencer vs Referral Programs

The pros and cons of affiliate, influencer and referral marketing
 

At Buyapowa, we see many digital marketers wondering what is the difference between affiliate, influencer and referral programs and which is best to help boost sales via word-of-mouth.

While all of these can be genuine forms of word-of-mouth marketing (although affiliate marketing may have nothing to do with word of mouth, and can be can be click arbitrage or other forms of marketing etc.) they differ from each other in a number of ways. For retailers just starting out, the terms can be easy to mix up. And even experienced marketers can struggle to understand the best time to implement such a program and the relative benefits of each. So which program is best for your business?

Which is the most cost-effective? Which will generate the greatest results? What considerations should I make before I choose one?

The answer is that it depends on you, your business model, and your product or service.  All of these word-of-mouth programs can be highly effective and profitable when deployed at the right time and in the right way for your business. But they each require different levels of effort, cost, and can bring you varying degrees of results.

How can Word-of-Mouth Marketing help my online business?

Word-of-mouth marketing is the oldest form of marketing known to humans. We are a social species, and regularly leverage our friends and family for advice on what to buy and where to buy it.  Before social media, and before there was any form of media, or even before there was a printing press, humans used word-of-mouth to tell our friends and family about businesses that had great products, great service and great value. Today, nothing has changed; researchers have consistently found that consumers trust the recommendations of their friends and family more than any other marketing method. And that we now have access to digital marketing tools, it makes it easier than ever before to make and receive referrals to businesses.

Clearly, e-commerce businesses that sell products and services online are best positioned to take advantage of advances in technology making it easy for people to share their favorite brands via social media, content sharing services, blogs, email and messaging applications. But online word of mouth can also be used to drive footfall instore and generate off-line sales.

Without a doubt, the three of the most popular word-of-mouth marketing strategies that you can leverage for your website are affiliate marketing, influencer marketing and referral programs.

What’s the difference between these programs? 

Let’s try to reduce the confusion, and start by defining these terms, using marketing parlance:

Influencer – a marketing influencer is anyone who has the power, reach and willingness to influence the purchase decisions of prospective customers for your business, usually in return for a one-time fee for each promotion – paid by you.

Influencers are people or groups who have a large audience of followers across various platforms, that is interested in — and potentially swayed by — the influencers’ opinions. Traditionally, influencers were media personalities from the arts, entertainment, sports, education, science, political and business fields. However, in this age of the micro-personality, in which ordinary people can leverage social media to achieve extraordinary reach, influencers might be everyday people who have each generated an extremely large following simply through their activities on social media.

You typically pay influencers a flat up-front fee for them to promote or endorse your product and bring you new customers. Examples of promotions can be Instagram or Facebook posts, YouTube videos, blog articles or any other forms of social sharing.  In each case, you’ll pay a fee for the post (usually paid before the post occurs) and results are not guaranteed. In many cases, the outcomes are not tracked at all, but in some cases followers can get a special benefit or reduced price if they use a code or link supplied by the influencer, which allows you to better link outcomes to the expenditure with the influencer.

But there is something else to note: There are some circumstances in which influencers may recommend your products for free, or for non-monetary compensation. However, this requires a tremendous amount of good fortune, product differentiation, and/or fairly epic marketing skill on your behalf.  So we’ll leave that topic for a future post.

The more popular or successful the influencer, the more you’ll pay for their service as an influencer for your brand. In addition to a fee for a promotion, influencers often also expect free products or services from you as partial reimbursement. Each promotional activity they undertake for you is usually paid for separately.

While you may engage with star referrers, or their agents directly, you can engage with endorsers on an influencer platform via an agency like D’Marie, Influitive, Tapinfluence and more.

Average Influencer Costs
 

Referral programs – a marketing method whereby you encourage your current customers to refer their friends to your business in return for a reward.  You track those referrals to desired outcomes, like a sale, and referral rewards are paid by you to the referrer when they generate the desired outcomes for you.

Referral marketing is – as we mentioned above – one of the oldest forms of business promotion, and is the simplest form of word-of-mouth marketing.  Customers of yours who know your business – and your products – refer their friends and family to you. When those friends make purchases at your store, you track how they were referred, and reward your advocates (your referrers) for their passion for your brand and evangelism.

Affiliate programs are a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought by the affiliate’s own marketing efforts.

Affiliate marketing often has little to do with word of mouth marketing, but is often confused with referral marketing as some affiliates do offer referral marketing as the solution they employ to drive outcomes. On this basis, we have included it in this analysis. However, many affiliates simply use their skill and knowhow with traditional marketing techniques, such as emailing, search engine optimization, paid search and, increasingly, paid social to drive traffic to your website.

A side-by-side comparison

So with all that said — let’s compare affiliates, influencers and referrers in more detail:

Program Type
Affiliate 
Influencer 
Referral 
Good For 

> New customer acquisition, incremental revenue growth.

> Products with broad appeal. 

> Products with high enough margins to pay affiliate commissions.

> Businesses with access to larger upfront marketing budgets.

> Brand recognition. 

> Association with celebrity images.

> Products with high cachet.

> Businesses that don’t need to closely track results to expenditure.

> New customer acquisition, incremental revenue growth. 

> Businesses of all shapes and sizes, and with a desire to scale.

> Businesses with many happy customers who could recommend the business to their friends and family.

Not good for 

> Products with a low sticker price or that only allow you to offer a small commission (affiliates like big commissions). 

> Undifferentiated offerings.

> Products with low cachet, low differentiation. 

> Products that don’t inspire brand affinity. 

> Businesses that can’t afford relatively large one-time outlays of cash or product.  

> Brand new businesses that might not be able to meet a high spike in demand.

> Businesses in markets that people do not naturally refer or may feel some sort of embarrassment (e.g. medical products).

> Products without enough margin to offer a discount as a reward.

> Businesses with poor quality products and services where current customers would not want to recommend them to friends.

Examples of advocates
> Bloggers, reviewers, publishers, and other digital promotion businesses. Many can be found on established affiliate networks.
> Sports, entertainment & business personalities, content creators
> Existing customers, current employees, their friends, family and peers
Cost Type 
> Commission per sale (eg. 5-10%)
> Fixed fee for promotion (Instagram post, Facebook video, Tweet, sponsored YouTube video, etc.)
> Reward in the form of cash paymets, dollar and percentage discounts, free products, third-party vouchers, or other rewards.
Pros for your business 

> Relatively easy to track. 

> Platforms exist to recruit affiliates.

> Relatively low cost (commission). 

> Pay for performance: you only pay when they bring you business.

> Celebrity brand association with you. 

> Broad reach of influencers.  

> Follow-on coverage (social media shares of the celebrity post).

> Very easy to track and optimize.

> Simple to communicate with your customers.

> Easy to scale.

> Numerous advanced features and strategies that can be deployed.

> A friend’s recommendation can hold a lot of value, particularly in cases of high-value consideration sales (e.g. mortgage, bank accounts, insurance, or mobile and internet plans)

Cons 

> High turnover of affiliates.  

> Diversion of direct sales to affiliates. 

> Lack of control over brand representation.

> Risk of low-quality or fraudulent sales

> Affiliates often partner with competitors to their products

 

> Competition for influencer mindshare. 

> High up-front costs prior to sales benefits.  

> Influencers can change rates quickly, reducing return-on-investment.

> Risk of the influencers subsequent behavior negatively affecting your brand.

> Difficulty in tracking influencer behavior and referrals

> Influencer costs can run very high (depending on the size and engagement of their audience)

> Influencers can promote competitor products

> Can take time to grow. 

> Referral programs require ongoing promotion.

Risks 
> Various types of fraudulent activity from unscrupulous affiliates: Fraudulent linking, Ad fraud, and Cookie stuffing.

> Celebrity “fall from grace”.

> Lack of alignment between celebrity brand and yours.  

> No performance guarantees.

> Offering high rewards combined with weak referrer-validation can lead to fraudulent referrals (self-referrals, etc).
Other things to be aware of

> The best (meaning: most effective) affiliates will focus on a niche. 

> FTC requires Affiliates and Influencers to disclose their paid relationship with the brand.  

> Look for affiliate programs that promote themselves as “white hat”.

> Many influencers are represented by agencies that can increase costs by taking their “cut” of fees.

> FTC requires Affiliates and Influencers to disclose their paid relationship with the brand.  

> There are a lot of referral marketing programs. 

> Prices vary.

> When implementing referrals, look for referral services that only pay out rewards for genuine purchases.

> Be careful to avoid referral companies that collect and take ownership of referral participant data and promote to your competitors.

Questions to ask yourself

So what word-of-mouth marketing method should you use?

The best place to start is by knowing whether or not you can afford one.  All of these types of services require an investment of your time and money.  Some marketers have asked whether or not it is possible to build their own influencer, affiliate or referral program. However, the same way you could build you own service to send emails or collect user reviews, you are often well advised to choose an off-the-shelf solution from a best in practice provider. We set out six reasons why you should outsource referral marketing here.

But a good place to start, is to look at your business and the quality of the product and service you offer. After all, if you don’t have a great product, why would people recommend you to their friends? But assuming your product and service is great, shouldn’t people recommend you to friends and family without expecting any reward?

Well, sure, anything is possible. But, while it is possible to leverage influencers and encourage third parties to refer people to your brand without being rewarded, it is challenging to build and maintain a network of such unpaid advocates. 

Now and again influencers will actively promote a product or service that they love without any financial consideration from the brand, but these examples are the exception rather than the rule. So while we would always encourage you to seek customers who will promote your products simply because they love you, this can be time-consuming and distracting for you as you grow your business. 

When it comes to influencer marketing, it is getting harder and harder to get the attention of online influencers. Simply because they are inundated by requests from retailers just like you, or from their agencies. And if your product and your branding do not stand out from the crowd, and you aren’t paying top dollar, it will be hard to solicit unpaid word-of-mouth marketing from them.  

Therefore, it’s important to understand that to proactively work with influencers, affiliates and even referrers there will be costs involved.  So before you invest, you need to know a little bit about your existing customer acquisition costs. This is so that you can determine the return on your potential investment in an external word-of-mouth marketing program.

For any type of such program — influencer, affiliate, or referral — you need to know your existing cost of acquisition (CAC) for each customer who makes a purchase with you. It’s also useful for you to know what your expected lifetime value of each customer will be. If you don’t have any customers this can be hard, however, it is possible to estimate what your costs and lifetime values will be by comparing with other businesses.

For example: If you expect to convert customers at industry standard rates, that means you’ll convert around 3% of the people that come to your store.  That means that 1 person out of every 33 people who visit your store will make a purchase.  

So, let’s say you’re running ads on Facebook, and that’s your primary source of traffic. In that case, you’re going to need to get 33 people to click on your Facebook ad and navigate to your store in order to get that one sale. If your average cost-per-click on your Facebook ads is approximately $2.00 (which is the going current rate), then you will have spent $66 on digital advertising to get that sale.  

More or less, that’s your Customer Acquisition Cost (or CAC). 

Now, let’s assume your product margins average around 30%, and your average shopping cart size across all devices is $75.00, which makes your gross profit about $22.50 on each successful checkout you get. With a CAC of $66, you’re going to need three orders from that customer to just break even on your marketing costs. So that’s not even putting any money in your pocket until after you get three purchases from that customer. 

Here’s the above calculation in table form. You can plug your numbers in to see how they match up:

Store site conversion rate:
3%
Number of Facebook Ad clicks required to get one sale:
1/3% = 
33 
Facebook Ad cost per click:
(example)
$2.00 
Total Cost of Facebook Ads for one conversion:
33x$2.00 =
$66.67 
Average Shopping Cart Size:
$75.00 
Average product margin:
30%
Gross profit per checkout:
$75.00×30% = 
$22.50 
# of checkouts/customer required just to recoup cost of FB ad:
$66.67/$22.50 =
3

At those margins, a referral program where you pay your referrers a 10% commission on the first sale from each referral starts to look attractive.

Knowing this, or having a really strong and supportable estimate of these numbers, will help you determine what value an external word of mouth marketing program can bring you.

On a per-program basis, there are a number of different things to ask yourself:

Questions specific to Influencer programs

  • Do my products have the prestige, originality or “x-factor” that a celebrity would risk their reputation on?
  • Can I afford the price that the influencer demands, and can I withstand the risk that the post doesn’t pay off? 
  • Are my products differentiated enough from competitive alternatives to stand out amongst thousands of daily celebrity endorsements? 
  • What happens if my influencer subsequently endorses a competitive product?  Do I care? Could it hurt my brand? 
  • What if my influencer has a very public fall from grace?  Can my business survive online-backlash?

“It’s rare that a $50,000 investment in a single Instagram post will pay off for a brand or business. How many packages of tea or tubes of mascara do you have to sell for the campaign to be a success?”

Tracey Harrington McCoy, chief operating officer, MtoM Consulting.

Source: Forbes.com

If you have a strong brand, have loyal customers who make repeat purchases, have access to some capital to spend up-front, and have an interesting product that celebrity influencers would be comfortable endorsing, an influencer program could be for you.

Questions about Affiliate programs

  • Is it worth my time to find affiliates, convince them to promote my products, track their posts, creative and follow-up?
  • Do I care if affiliates “steal” traffic from my own online ad-spend? (In other words: What if I end up paying commissions for business that I could have got by myself?). Maybe you don’t care, but it’s worth asking yourself the question.
  • Do I have the time to monitor my affiliates’ ads to make sure they are representing my brand well? 
  • Are my prices set correctly:
    • Is my margin high enough? Can I afford to pay commission on a large number of sales? 
    • Is my price high enough? Will affiliates make enough money to make it worth their while?
    • Is my price attractive enough?  Will the referred customers pay the price I need to charge? 
If your math shows you that your product prices are set “just right”; and if you’d rather rely on external affiliates’ promoting your product than going through the time and effort to build your audience yourself, then affiliate programs could be just right for you.

Questions about Referral programs

  • Do I have the right mix of quality products, ease-of-purchase, and great customer service such that my customers will refer their friends to my business? 
  • Can I afford to provide incentives (including cash or third party vouchers, percentage discounts, or free service) to people who refer my products? 
  • Do I have a system in place to track referrals?
Again if your margins can support paying rewards (and you should reward people for the effort involved in the referrals they make), and you have a product or service that your advocates would be happy to refer, then referral marketing could be just right for your business.

Next steps

All of these types of programs are going to eventually cost you money. 

So, therefore, it’s time for you to do a little bit of analysis and research:

  • Figure out your existing (or expected) customer acquisition cost (CAC) and customer lifetime value (CLTV).  It’s easy to find examples online of what you might expect, and we’ve provided links in this article.
  • Know your product margins for each product you sell. Figure out an average that you might expect. The cost of your affiliate, influencer or referral program needs to come out of that.  

Be ready to do some work. All of these programs can perform well for you, but, just like every other aspect of your business, you will have to do some work to see results. But, don’t discount the option of working with affiliate, influencer and referral marketing solutions providers to make that work a little lighter.

Ready to get started with your own word-of-mouth marketing program or growing your current program’s results? Reach out to one of our referral experts today.