The differences between loyalty and referral programs

Some of our customers have recently mentioned that their referral program has a side benefit of increasing loyalty among customers. They’re able to see that customers who make referrals do tend to be more loyal, and loyal customers tend to refer. Ultimately, it’s interesting to observe how loyalty program applications and referral programs drive different types of behavior, and how each program is considered by the brand.

Both referral programs and loyalty program applications issue rewards for consumer behavior. So, both are rewards programs. But there are some important differences between referral and loyalty programs that aren’t always well understood.

Here are some criteria to think about when you’re considering a referral program, a loyalty program application, or both.

Referral Program Loyalty Program
Good for businesses with…
  • Strong brand image and brand affinity
  • Digital presence
  • High loyalty
  • Higher margin
  • High advocacy
  • Low to moderate switching costs
  • Low margin
  • Highly competitive
  • Low switching costs
  • Generally lower affinity
  • Loyalty can be across spectrum
Consumers are rewarded for… Referring a friend who becomes a customer Making frequent purchases
Reward values are typically… Medium / high (can grow to 50 – 100% of annual purchase value) Low (1 – 2%)
Can be easily automated when… Have an online store Have any kind of automated point of sale system
Purchase frequency is… Moderate (monthly recurring, quarterly) Very high* (daily, weekly)
Behaviour being rewarded is… Bringing new customers at a very low cost to the brand Not shopping somewhere else
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