When it comes to referral programs, terminology can quickly become confusing, not to mention contentious. A debate on the difference between an affiliate program and a referral program has actually been known to start a fistfight.
Ok, so maybe that isn’t quite the case, but the difference has at least sparked many debates on online forums, often with little consensus being reached.
This guide is a living document that will first set some basic referral program definitions and then grow and evolve as new terminology enters common usage in referral marketing.
How to use this guide
Like a Keener: Hey, we all know the type that just wants to know everything (says the person writing a terminology guide for referral programs). Feel free to read top to bottom and share this article with your friends to show what you just learned!
Like a Boss: Press ctrl-F, or cmd-F for my fellow mac users, and type the word you are looking for. I know you have things to do, so get in and out of here as fast as you can.
Like a Judge: Dig in and start getting semantic with us. Read each and every word and then get crazy in the comments. You have the passion, you have the knowledge and you have the commitment to make this article even better; we thank you!
We will start with a softball here, or at least what I wish was a softball.
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12 Terms You Need to Know Before Launching a Referral Program
1 – Referral Program
A referral program is any systematic way that your company encourages people to tell other people about your product or service.
It is important to note that a referral program is an overarching concept and not a specific type of program. This means that things like affiliate programs, customer referral programs and partner programs are all referral programs. In polite conversation, it isn’t worth getting into the details. When growing your customer base is crucial to your company picking the correct variation could be the difference between success and failure.
2 – Referrer
A person who refers another person.
These are the people that are recommending your product or service to others. They can be users, resellers, affiliates, partners or any other program-specific term you choose to use.
3 – Referee
A person who was referred by another person.
These are the new customers you are acquiring from your referral program. They can be paying customers, non-paying customers or even other people who signed up to your referral program.
4 – Customer Referral Programs (A.KA. Refer a Friend, Tell-a-Friend, Tell-A-Pal, Social Referrals)
Customer Referral programs are referral programs designed to specifically motivate your existing customers to help you find new customers.
Customer referral programs are extremely powerful because when an existing customer recommends their friends to your company, they are transferring the trust their friend has in them to you. This is why a friends recommendation is the only form of marketing that directly produces purchasing behavior.
One of the best known online customer referral programs is the Dropbox customer referral program. Dropbox rewarded both their existing customers and new customers with additional storage space when a new customer signed up for the service. This referral program had a very low barrier to success, friends just had to signup for a free account, but it was very effective at propagating the company’s freemium product.
5 – Affiliate Program
Affiliate programs are referral programs that reward third parties, typically with cash, when new customers signup for your product or service as a result of their referral.
These programs can be effective when you have a collection of powerful influencers who have the ability to refer your product on a large scale (blog, podcast, etc…) or a community of consultants who work directly with your target customer base. With a monetary incentive, these individuals have a reason to refer your product over someone else’s.
Probably the largest and best known online affiliate program is the Amazon Affiliate program. You can see below that they have changed the name of the program to “amazon associates” because the word affiliate has earned a nasty reputation over time. This is primarily due to the tactics that individuals will deploy in order to earn cash when referring a product they don’t use.
6 – Partner Programs
Partner programs are referral programs that reward certified third party vendors of your product or service with rewards such as cash, recognition and advertising.
Partner programs typically have a much more rigorous admission process than affiliate programs and come with some legal obligations. The admission processes can include paying fees, going through a certification program and/or attending training sessions. Due to this rigorous process partners are able to state officially that they are associated with your company and may be listed on your company website as a way of vouching for them.
Google Apps has a very active partner program where partners must complete milestones throughout the certification program to move from one level of partner to another. This is done to protect both Google and Google’s customers by ensuring only top quality companies are listed as partners.
7 – K-Factor
A K-factor is a measure of how viral your viral loop is.
If your viral coefficient is higher than 1, every new user you add to your system will add at least 1 other user and so on. Technically, when you have a K-Factor of 1 or greater you have a viral application. The reason this is so desirable is that if you did nothing else to market your product your customer base would continue to grow as long as your K-Factor remained above 1.
If you don’t have a K-Fact of greater than one don’t worry about it, it’s a pretty hard thing to do.
For those of you looking for the math, the simplified version of calculating your K-Factor, or rate of virality is:
I = Number of Invitations
CR = Conversion Rate
I x CR = K = Viral Coefficient
8 – Viral Loops
A viral loop is a mechanism that has users refer others to your product or service and then ultimately turns those referees into referrers through the same mechanism.
Some example viral loops are:
- Users inviting others to collaborate together in a project management tool,
- A discount earned for each new users who registers,
- Users sharing their progress in a game.
9 – Organic Viral Loop
Organic viral loops are viral loops that occur naturally through the regular use of your product or service.
Inviting a co-worker to review a plan in a project management tool is an example of a organic viral loop. This is organic because in project management, it is required that others can view and collaborate on a project and in turn, the invited user will likely invite others to the project as it grows.
Organic viral loops are considered extremely hard to build into a product or service after it already exists. This is why authors like Seth Godin encourage you to include organic viral loops into your application in the initial design phase.
10 – Artificial Viral Loop
Artificial viral loops are viral loops created exclusively to encourage a viral loop and do not add to the natural use of your product or service.
Reward a customer with $20 credit for every friend that registers for your service is an example of an artificial viral loop. These are far more common than organic viral loops because there are many product and services where organic viral loops are not possible. Artificial and organic viral loops are not exclusive.
11 – Rewards – Reward Me (One-Sided) vs Reward Both (Two-Sided)
Rewards are what participants in a referral program earn on successful completion of an artificial viral loop.
A key part to the success of an artificial viral loop is picking who to reward. Programs typically reward either the referrer (reward me) or the referrer and the referee (reward both).
Studies have been done on this subject and have found that one-sided rewards (reward me) work slightly better if you have a weaker brand, and two-sided rewards (reward both) work considerably better if you have a stronger brand.
12 – Happy Moment
In referral programs, a happy moment is the time when a referrer is most likely to make a referral typically due to a recent happy experience while using your product or service.
The effectiveness of a referral program depends, in part, on when a user is prompted to make a referral. If a user is prompted to make a referral right after an unhappy experience your chance of them making a referral is low because they don’t want to tell their friends about bad products. On the flip side, if a user is prompted right after a happy moment they are much more likely to make a referral even if the have previously had a bad experience.
Finding a happy moment is not a trivial task. It can require a critical eye, trial and error and strong in-app analytics to find your optimal happy moment.
As I said at the start of this guide, this is a living document that will grow and evolve with the community. If you have any questions, comments or suggestions, please let us know!