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What’s the Difference Between Loyalty and Referral Programs?

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Marko Zivanovic

Content Manager

Loyalty and referral programs

If you run a local business, chances are you have heard about loyalty and referral programs before. A lot of people claim that a referral program changed their business forever. While some people insist they have reached incredible business growth by turning existing customers into loyal ones.

Naturally, you have to ask questions because you want to know, “What is the right thing for my local business?”

The purpose of this blog post is to show you the key differences between loyalty and referral programs, so you can decide which one is better for your business.

But before we start, let’s clarify something.

How do we know the answer?

In the last 9 years, Referrizer has been providing loyalty and referral program solutions to 13,000+ clients in a variety of industries. We have many clients that have achieved great success with these programs.

Using real data and first-hand experience, we will provide you with a unique and complete insight that will help you better understand loyalty and referral programs.

What are loyalty program benefits?

A loyalty program will turn your one-time customer into loyal customers. When a customer becomes engaged with your loyalty program, they are more likely to visit you again in the future and make repeat purchases.

There are several key benefits that you can get from a loyalty program, including an increase in:

  • Customer retention
  • Customer lifetime value
  • Sales and revenue

How does a loyalty program work?

A customer loyalty program is a way for businesses to reward their most loyal customers. People can earn loyalty points by making purchases or completing other tasks, and they can then redeem those points for discounts, freebies, or other benefits.

Once you have customers engaged with your loyalty program, you can expect people to post more reviews, share your offers on social media, and regularly visit your business in order to earn check-in points.

What are some of the most popular loyalty programs?

When it comes to creating loyalty programs, you don’t have to create one from scratch. You can figure out what is working for others and then implement those steps into your loyalty program in a unique way.

Here’s a look at 3 loyalty programs from some of the largest companies in the world, along with 3 key takeaways from each that you can use for your business.

Starbucks Rewards

When you look at Starbucks’ loyalty program, the thing that stands out most is simplicity.

  • It’s super easy to join: create an account, and you are ready to go.
  • You understand right away how they reward customers.
  • On their landing page, they highlight multiple paying options. This reduces any hesitation that people may have about joining.

Hilton Honors

The biggest takeaway from the Hilton loyalty program is how to highlight benefits.

  • A new member bonus gives you instant satisfaction and you can easily see how your points grow.
  • Exclusivity is a great way to persuade people. Elite-level benefits and exclusive app features are carefully chosen to appeal to people’s desires.
  • Special offers available only to loyalty program members are a great way to create exclusivity and, at the same time, upsell your customers.

Dunkin’ Donuts DD Perks

Dunkin’ Donuts DD Perks program is a great example of how you can use gamification to keep people engaged.

  • Every time you visit Dunkin’, you can earn points towards prizes like a free beverage.

However, they also have a unique spin on their benefits:

  • Dunkin’ allows you to pay with a debit/credit card or with cash to eliminate potential objections.
  • When you are a member of their loyalty program, you will receive orders faster than regular customers. During rush hour, this benefit alone can persuade someone to join their loyalty program.

What are referral program benefits?

A referral program is all about turning your customers into your brand ambassadors. When a referral program is done right, it can bring you a lot of new customers that you wouldn’t have otherwise. The referral process typically involves the existing customer recommending the product or service to their friend, who then makes a purchase.

There are several key benefits that you can get from a referral program, including:

  • Increased brand awareness
  • More leads and sales
  • Boosted customer acquisition rate
  • Improved customer loyalty

How does a referral program work?

A customer referral program is a way for businesses to reward their customers for referring new people. Every time someone refers a new customer to your business, they will earn a referral credit, which they can then use for discounts, freebies, or other benefits.

The are 2 types of referral programs:

  • 1-way referral program: Only customers that refer someone receives a reward.
  • 2-way referral program: Both the customer and the referral receive rewards.

From our experience, businesses get more referral conversion rates when they offer a 2-way referral program.

What are some of the most popular referral programs?

As it was for a loyalty program, the same goes for the word of mouth marketing – figure out what works for others and then implement the same practices in an original way.

Here are the 3 companies, that have mastered referral programs and 3 key takeaways on why they work so well.

Uber

Local businesses that make their referral program as simple and user-friendly as possible have the most success Here are some reasons why Uber’s program is attractive and easy to use:

  • Referring is done through the app, so people don’t have to deal with referral cards.
  • People receive automated notification follow-ups regarding the process of their referrals.
  • Uber makes it seamless for their users to share referrals on social media.

All of this keeps their referral program easy to use, effective, and simple at the same time.

Paypal

The biggest takeaway from Paypal is how effectively they have implemented a 2-way referral program.

  • Both the person making the referral and the new customer get a reward.
  • They encourage the first transaction to happen as soon as possible in order to receive your reward.
  • Since they have a limit of 10 referrals, they cleverly use that to create a powerful headline that encourages people to refer.

Fiver

Here’s a look at how one more well-known company understands the importance of providing rewards to both existing and new customers.

  • Since the goal of word-of-mouth marketing is to generate new customers, Fiverr focuses on conversion rates and encouraging people to make their first purchase.
  • They provide 10% OFF on the referred person’s first purchase, and the person who brings a referral gets a 10% commission on the referral’s first order.
  • Fiver makes it easy for people to share a unique code using one click to share through 1-on-1 communication and also on social media.

When to use loyalty and referral programs?

Loyalty programs are usually used to retain existing customers and keep them coming back for more.

Referral programs are designed to encourage existing customers to bring other people – like friends and family- to your business so that referred friends and family can become paying customers.

The bottom line is that both loyalty and referral programs can be highly beneficial for businesses. It all comes down to figuring out which one will work best for your business and customers.

How can you decide? Instead of testing both programs and wasting time, you can take a shortcut and read below how loyalty and referral programs work for specific small business industries.

Spa/wellness

What our clients in the spa and wellness industry do is to combine both loyalty and referral programs.

They encourage frequent visits by rewarding clients with points through the loyalty program.

And when they need more customers, they simply launch a referral campaign to loyal customers and reward them with exclusive discounts on services. This results in more purchases and more visits.

If you are in the spa or wellness industry and you don’t have a loyalty and referral program yet, we recommend implementing both.

Fitness studios and gyms

Since most fitness businesses have memberships, it makes sense that loyalty programs work so well for them. One of the best practices that fitness businesses use is to reward people for each visit.

By doing so, they are keeping people from switching to competitors since they are closer to rewards with every visit. Also, this works great as motivation for people to work out regularly. Once members start seeing progress toward their goals, they will be happier and more loyal.

And what do loyal members usually do? They become brand ambassadors and spread the word about your business. In some cases, even if you have loyal customers, they might need slight motivation to start telling everyone about you. That is where a referral marketing program comes into place.

If you are looking to maximize results for your fitness business, it’s important to implement a loyalty and referral program right away.

Dentists

After working with many dental businesses, we noticed that typical loyalty programs don’t perform well in this industry.

On the other hand, the referral program has shown great results for a simple reason:

Research shows that 92% of people trust referrals from people that they know. In a world where people are looking to find the best doctors, it makes sense that they would go with one who has been recommended by someone that they know.

If you are in the dental industry, we strongly recommend that you try referral marketing for your customer acquisition.

Restaurants

Have you ever heard of The Pareto Principle? It says that 80% of your sales come from 20% of your customers. For restaurants, this is true because your regular customers are responsible for most of your profit.

Most restaurants use loyalty programs to turn people into regular customers so they can fill the place with less effort and get rid of slow days.

As we saw for spa/wellness and fitness industries, the same goes for restaurants. Loyalty and referral programs give the best results once they are combined.

By using both, you are encouraging frequent visits, getting more regular customers, and motivating those customers to spread the word about your business. A simple recipe for fast business growth.

Massage therapists

The beauty of having a loyalty program as a massage therapist is that you can reward your customers for referring other people to you.

You can give them a 50% discount for every person they refer to you. This way, you are encouraging loyalty and referral business at the same time.

Another great idea is to offer loyalty points for every massage session and let your customers redeem those points for a free massage. This is a great way to keep your customers coming back for more while also encouraging them to refer other people to you.

Yoga instructors

Loyalty programs for yoga instructors usually take the form of discounts for people who attend a certain number of classes.

For example, you can offer a 10% discount for people who come to 10 classes, a 15% discount for people who come to 20 classes, and so on.

This is a great way to keep your regular customers coming back. Once you see that they are becoming loyal customers, you can ask them for referrals and ensure that you get new clients.

Dance and music schools

The loyalty program that works best for dance and music schools is a combination of loyalty points and referrals.

You can give your customers loyalty points for every lesson they take and let them redeem those points for free classes. This is a great way to keep your customers coming back for more.

At the same time, you can offer a discount for people who your loyal customers refer. This way, you are encouraging both loyalty and referrals. Wondering what you can give to customers that referred new people? Help them to collect loyalty points faster by giving the most points for successful referrals.

How do you use referral and loyalty programs at the same time?

As you have seen, loyalty and referral programs deliver the best results when they are combined.

Loyalty programs keep your customers coming back for more. Referral programs help you get new customers.

Here is our top tip on how to implement both referral and loyalty programs successfully:

Use one software: When your loyalty and referral program is in one software, life is much easier. You will be able to keep track of rewards, points, and referrals, and all your data will be at the tip of your fingers. If you are looking for such a solution, check out Referrizer. It’s a marketing automation platform that businesses like yours use for loyalty and referral programs and much more.

Marko Zivanovic

Content Manager

I use engaging words and strategic approaches to create content that converts.

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Marko Zivanovic

Content Manager

I use engaging words and strategic approaches to create content that converts.

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