More brands are leveraging the popularity of Instagram and other social channels to offer their loyal followers the chance to refer their own friends to buy products.
Referral marketing is not new, but systematically leveraging social channels is a fairly recent phenomenon. We’re not talking about influencer marketing using celebrities as endorsers. This social referral marketing is where brands capitalize on their regular followers and give them discounts or some kind of credit/reward if they tell friends to make a purchase.
While this might sound a little like affiliate marketing, it’s not. All of the above fall under the wide umbrella of referral marketing. They each use third-party referrals and share some common characteristics, but there are differences in the levels of effort, cost, and results.
Referral marketing is often handled by the brand, using personalized outreach to target specific groups and make them “ambassadors” or advocates. This type of marketing revolves around the shared relationship between the brand and its customers, and their friends or associates.
Successful referral campaigns motivate customers to share products or services with their family, friends, and associates in a straightforward, authentic fashion. It’s all about a one-to-one relationship. It’s akin to a trusted friend clueing their friends in on something useful, cool or new.
A Nielsen consumer report showed that the most trusted form of advertising is a friend’s recommendation, with 83% trusting the source for buying decisions. The report also found that people are 4 times more likely to buy when referred by a friend.
The ROI for referral programs can increase as user engagement and new customers expand the network of satisfied customers for the brand. However, there are many challenges:
- It takes time to grow a referral program
- It needs to be promoted and clearly explained
- The brand must be able to afford incentives (often for both the referrer and the person referred) to be most effective
- Tracking can be complicated
Social referral marketing is often confused with influencer marketing. Again, there are some similarities, but they are different. Influencers are typically people who have each generated a large(or very targeted) social following. They are typically paid a flat up-front fee to promote or endorse products and drive new customers for the brand. Promotions can be Instagram or Facebook posts, YouTube videos, blog articles or other forms of social sharing. In each case, they are usually paid a fee before the post appears.
Influencer marketing is typically used by online marketers with a large budget because its effectiveness is not predictable. It often can yield a one-time big boost in sales, but not necessarily an ongoing steady revenue stream. There are a lot of factors that can make influencers campaigns a boon or a bust. Each brand needs to set goals and internal expectations, along with metrics to measure effectiveness.
Affiliate marketing relies on paying third-party websites and affiliate networks while referral marketing uses the existing customer base to provide outreach and organically to increase revenue. To maintain a quality affiliate program, affiliates need to be relevant and trustworthy in the eyes of buyers. In addition, affiliates must be capable of providing appropriate marketing and promotional materials to convert leads.
The primary motivation for affiliate marketing is financial. Affiliates are trying to earn a commission or another type of financial compensation by driving sales. This type of performance-based marketing is a long-proven channel that focuses on one-to-many relationships. The affiliate channel uses standardized advertising methods such as SEO optimization, PPC, email marketing, content marketing, and display advertising to help with promotions and offers.
Additionally, Affiliate programs are proven to work for nearly every type of product and service. And are effective when a brand wants to address a large population. Paying a commission for each sale or action (signing up for a newsletter or driving a new customer) is very scalable and predictable, That’s because every affiliate has a unique ID and all clicks and sales are tracked.
There’s no reason an eCommerce retailer can’t run all three types of referral efforts simultaneously. But each brand will need to evaluate what is right for them. Regardless, when venturing into any one of these channels, each etailer should determine the cost of customer acquisition for each effort, the lifetime customer value for those in the respective channels, the estimated costs, and the potential ROI. Only then can an informed decision be made.