Getting the word out about your SaaS product is essential for long-term success. In today’s heavily crowded online marketplace, however, simply having a website and some social media accounts is not enough. You need to actively and intentionally promote your product if you want it to succeed. Therefor you might wonder, should I start an affiliate or referral program?
There are many ways to promote a SaaS product. Two of the most popular methods are referral programs and affiliate programs. But which one is the best fit for your business? This article will compare and contrast the two types of programs, so you can decide which one is right for you.
Affiliate or referral program – The referral program
A referral program involves offering existing customers a discount or other incentive for referring new customers to your product. Some SaaS companies that’ve made referral programs work well include Dropbox, Evernote, and HubSpot.
Referral program pros and cons for SaaS
Some pros of running a referral program include:
They’re relatively easy to set up and manage
All you need to do is create a discount code and share it with existing customers. They don’t require a lot of ongoing effort – once the program is set up, customers will do the work for you by sharing your product with their friends and family.
Great way to get word-of-mouth marketing for your product
Several studies show that people are more likely to trust recommendations from people they know. This makes word-of-mouth marketing one of the most powerful marketing tools SaaS companies have at their disposal.
Can help build customer loyalty
Getting new customers is becoming increasingly difficult and expensive. A study by Bain & Company found that acquiring a new customer can cost six to seven times more than retaining an existing one.
Boosting customer loyalty is one way to offset these costs and keep your customer acquisition costs down.
Boost conversion rates
Referral programs can also help boost conversion rates. A study by Harvard Business School found that referrals can increase conversion rates by up to 50%. That’s because people who come to your product through a referral are more likely to convert because they’ve been pre-qualified by someone they trust.
Increase customer lifetime value
Increasing customer lifetime value is crucial for SaaS companies. That’s because these types of products typically have recurring revenue streams. The more customers you have using your product, the more money you’ll make in the long run.
Referral programs are effective in increasing customer lifetime value because they encourage customers to keep using your product. Studies show that customers referred by someone they know are more likely to stick around long-term.
In fact, a study by the Wharton School of Business found that referred customers have a 16% higher lifetime value than non-referred customers. Another study by Deloitte found that referred customers are also 18% more likely to stay with a company for three years or more.
Cons of Referral Programs for SaaS
While referral programs have a lot of advantages, there are also some potential downsides to consider.
Can be difficult to track results
Referral programs can be difficult to track because there are often many touchpoints between when a customer is first referred and when they finally convert. For example, a customer might be referred to your product by a friend, but they might not sign up for your product until they see an ad for it later.
This can make it difficult to attribute conversions to your referral program. However, there are some ways to get around this problem. For example, you can offer a unique referral code to each customer. Of course, this means additional work for you to manage all of these codes.
Can take a long time to see results
Another downside of referral programs is that they can take a long time to see results. That’s because you need to wait for customers to refer other people to your product. This can be a slow process, especially if you’re just starting out.
However, there are some things you can do to speed up the process. For example, you can offer a good incentive for customers to refer other people to your product. This can be anything from a discount to a free month of service.
You can also reach out to influencers and ask them to promote your referral program. This can help you reach a larger audience and get more people referring people to your product.
Can be expensive
Referral programs can also be expensive. That’s because you need to offer an incentive for people to refer other people to your product. This can be anything from a discount to a free month of service.
Of course, the size of your referral program will also affect its cost. If you’re offering a large discount or a free month of service, then your program will obviously cost more than if you’re offering a small discount.
You also need to consider the opportunity cost of offering a referral program. That’s because you could be spending that money on other marketing initiatives that might be more effective.
For example, you could be spending that money on paid advertising to reach a wider audience. Or you could be investing in content marketing to attract more organic traffic.
Can be difficult to scale
Referral programs can also be difficult to scale. That’s because they rely on customers taking action to spread the word about your product. As your customer base grows, it can become more difficult to get each customer to refer your product to their friends and family.
To offset this, you can try to incentivize customers to refer your product. For example, you can offer a prize for the customer who refers the most people to your product.
What to consider when setting up a Referral Program?
If you choose to set up a referral program for your SaaS company, here are a few things to keep in mind to make sure it’s successful.
1. Incentives
What are you offering as an incentive for people to refer new customers? Referrals are more effective when there’s a good incentive involved. So, take time to think of something that’s valuable to your customers but isn’t too expensive for you. While discounts are a good option, you could also offer freebies, points, or other rewards.
2. Eligibility
Who is eligible to participate in the referral program? Deciding who can participate in your referral program can be tricky. You don’t want to make it too exclusive, or else no one will participate. But you also don’t want to make it too inclusive, or else you’ll end up losing money.
A good rule of thumb is to make sure that only customers who are likely to refer new customers are eligible. This could include customers who’ve been with you for a long time or customers who regularly use your product. Also, limiting the number of referrals each customer can make can help to prevent abuse of the system.
3. Tracking
Tracking is essential to the success of any referral program. You need to be able to track who’s referring new customers so that you can properly credit them. Also, how many referrals they’re making. This information can help you to identify your best customers and see which incentives are working. It can also help you keep track of your costs and potential abuse.
Manual tracking can be time-consuming and difficult. So, you might want to consider using tracking software. This can automate the process and make it easier to track and manage your referral program.
4. Program Rules
What are the rules of the program? For example, how many referrals does a person need to make before they receive an incentive? What is the value of the incentive? When do customers receive their incentive?
It’s important to have clear and concise rules for your referral program. This will help to prevent abuse and ensure that everyone knows what they need to do to participate.
5. Marketing
Just because you have a referral program doesn’t mean people will automatically start referring new customers. You need to let them know about the program and how it works. The best way to do this is to promote it on your website and in your email marketing. You could also include it in your social media marketing and paid advertising.
The key is to make sure people know about the program and what they need to do to participate. You can’t just expect them to figure it out on their own.
Affiliate or referral program – The Affiliate Program
An affiliate program is a more traditional marketing tactic. With an affiliate program, you pay individuals or companies (affiliates) a commission for each new customer they bring to your product.
Pros and Cons of Affiliate Programs for SaaS
Affiliate programs can be a great way to market your SaaS product. But they do have their pros and cons.
Pros of Affiliate Programs for SaaS
1. You only pay for results
With an affiliate program, you only pay when someone brings you a new customer. So, there’s no risk involved.
2. You can reach a larger audience
With an affiliate program, you can tap into a larger network of people who are already promoting similar products. This can help you to reach a wider audience than you would be able to on your own.
3. You can get creative
With an affiliate program, you can be creative with how you structure your commissions. For example, you could offer a higher commission for customers who stay longer or who spend more money.
Cons of Affiliate Programs for SaaS
1. Brand control
With an affiliate program, you’re giving other people control over the representation of your brand. And if they promote your product in an unwanted way, or with incorrect information it could reflect badly on your business. Some brand monitoring is therefore required.
2. It can be difficult to track results
Tracking results can be difficult with an affiliate program. You need to be able to track when a customer was referred and how they found your product. This information can be difficult to obtain. Check out our article on affiliate marketing software for more information.
3. There’s a high risk of fraud
Studies show that affiliate fraud is on the rise. This is when affiliates sign up for your program and then create fake accounts to refer themselves. This can be difficult to detect and can cost you a lot of money. We dedicated this article on affiliate fraud detection.
What to consider when choosing an affiliate program?
There are a few key things to keep in mind when setting up an affiliate program:
1. Commission Structure
What you pay in commissions will depend on your product and your business. But it’s important to make sure that you’re offering a competitive rate. If you don’t, people will be less likely to promote your product. You also need to think about what point of the customer journey qualifies for a commission. For example, do you only pay when they make a purchase? Or do you pay for each new sign-up? Making this distinction will help to prevent fraud.
2. Affiliate selection
The quality of your affiliates will have a big impact on the success of your program. So, it’s important to take the time to select the right affiliates. You’ll want to set up objective selection criteria and then use that to screen potential affiliates.
3. Tracking and reporting
It’s important to have a good tracking and reporting system. First, you need to be able to track when a customer was referred and how they found your product. This helps you to identify which affiliates are driving the most conversions. Second, you need to be able to report on this data. This helps you to see how your program is performing and identify any areas that need improvement.
4. Fraud prevention
As we mentioned before, affiliate fraud is on the rise. So, it’s important to put measures in place to prevent it. Failing to do so can cost you a lot of money.
Some effective security measures to consider include IP tracking, link cloaking, and referral limits. You’ll also want to have a clear policy in place for dealing with fraudsters. You can read more tips in our guide to running and affiliate marketing program.
Which One Works Best? Affiliate or referral programs?
There’s no easy answer, as each approach has its own pros and cons. In general, though, a referral program is more targeted and offers more control over how users promote your product. An affiliate program, on the other hand, is more broad-based and can reach a wider audience.
So which one should you choose? It really depends on your goals and objectives. If you’re looking to generate a lot of buzz and get people talking about your product, a referral program may be the way to go. If you’re more interested in reaching a wide audience and generating sales, an affiliate program may be a better option.
Ultimately, though, the best approach is to experiment with both and see what works best for your business. Whether you choose to start an affiliate or referral program, the quality of your partners determine your success. See our guide for recruiting partners to find out how you can find high quality partners.