Referral links are when another domain publishes a hyperlink, usually with an advertising description/graphic, to your site. Reciprocal links are when two, or more, sites agree to publish referral links to each other.
Referral links can benefit site promotion is several ways:
Directly creates traffic
Users can link from other sites to yours
Creates name recognition
Increases people's exposure to you when they view your ad
Boosts search engine positioning
SE spiders will visit more often and your link popularity is improved
Referral Link Formats
Banner ads
Graphical (most common) or text links prominently displayed on a site.
Favorite links page
Web page containing a list of links to recommended sites
Reciprocal links programs
Web page containing a list of links to recommended sites
E-mail referral links
Links published in a newsletter or other form of e-mail message
Hidden links
Links that are not visible on a page. Used only to boost link popularity and spider travel.
Referral Link Compensation
Many forms of compensation for adding referral links on a site. Below is a list of the more popular ones.
Pay per impression
A site receives payment for each time they display a link/ad
Affiliate Programs
Payment for click through or commissions on purchases
Reciprocal links
Both sites get a link to one another