• Ivaylo Yorgov

CX Science: for a more effective referral program, incentivize the receiver not the sender


Key takeaways:

  1. Sender-benefiting and Recipient-benefiting referral programs achieve similar referral rates. In the former case it’s the self-interest that drives the recommendation; in the latter, the lack of material incentive for the sender is offset by reputational benefits

  2. Recipient-benefiting programs are more effective in driving uptake as they minimize the action cost for the recipient. This is especially true if the action is rather costly

  3. All in all, recipient-benefiting programs result in a higher number of new customers


Implications:

  1. It is worth implementing, or at least experimenting with a referral program incentivizing the recipient of the referral

  2. This is even more strongly the case is the recipient is expected to make an expensive purchase or to expend a lot of resources.



Dozens of real-life examples provide evidence that referral programs are one of the best ways to attract new customers. Тhey are one of the most efficient marketing tools we have at our disposal – designing and implementing a good word-of-mouth program costs significantly less than running a TV ad for example. And it goes way beyond that: customers trust a peer recommendation a lot more than an advertising message and they form much stronger relationships with brands recommended to them. As a result, “referred customers generated higher margins and were more loyal than non-referred customers, resulting in a customer lifetime value that was 16 to 25% higher”.


A key question when designing a referral program is how to nudge customers to advocate for your brand. In virtually all cases these programs incentivize either the sender of a referral (40%) or both the sender and receiver (55%); less than 5% of the programs incentivize the receiver only. Now, this makes sense from a certain perspective: “From evolutionary biology to neoclassical economics, many theories of human behavior posit that humans are driven primarily by self-interest. The most effective incentives should therefore be those that maximize material payoff to the decision maker. Indeed, self-benefiting incentives outperform prosocial (or “other-benefiting”) incentives in many contexts: for most reward magnitudes, people exert more effort when offered selfish incentives compared with equally sized prosocial incentives (DellaVigna and Pope 2018; Imas 2014; Schwartz et al. 2019).”


A study recently published in the Journal of Marketing Research set out to investigate if this assumption is wrong and uncovered insights that are (close to) paradigm-shifting. Programs offering benefits for the receiver achieve a considerably higher uptake in new customer acquisition compared to sender-benefit programs. Even though sometimes sender-focused programs achieve higher referral rates, they seem to be less effective in converting to purchases/sign ups. Why and under which circumstances do sender-benefiting programs work better? Read on.

Photo by Mathieu Stern on Unsplash

“Homo economicus, it should not be forgotten, inhabits a social world.” (Dale Miller)


One reason recipient-benefiting referrals work is that people care not only for their self-interest. We are all also in the business of managing our reputation. Consequently, we are oftentimes tempted to and do act not only on behalf of what works for us, but also for altruistic reasons. Multiple studies have found that


“Reputational rewards motivate people to behave generously due to a strong desire for social approval (Ariely, Bracha, and Meier 2009; Grant and Gino 2010) and a fundamental human need to belong and maintain close personal relationships (Baumeister and Leary 1995).”

So when the authors investigated if recipient-focused benefits achieve the same referral rate as sender-focused ones, they discovered that this is indeed the case. To make this point even more strongly, they also explored this question in a situation in which the benefit was recipient-focused and the sender was to remain anonymous. Unsurprisingly, as the anonymity condition offers no reputational benefit for the sender, the referral rate was considerably lower; in all other cases though a recipient-benefiting incentive resulted in the same referral rate as a sender-benefiting one. Long story short, reputational benefits motivated people as strongly as their self-interest.


Action costs matter


One of the major potential obstacles to referral programs is that they require the recipient of the referral to take an action or to purchase something, which might often be quite expensive. At the very least, the receiver of the referral needs to spend energy in taking that action.


Considering his, it only makes sense that a referral benefit that goes to the receiver will make it easier for them to act. Indeed, in a number of experiments the authors of the article found out that the uptake rate received a strong boost when the recipient of the referral was incentivized to act. And the uptake isn’t just marginally higher – it almost triples!


In a field experiment for a photo-sharing app for example the uptake rate with sender-benefiting incentives was 0.4%; with recipient-benefiting one it increased to almost 1%. In another field experiment for a video-rental company the respective results were 6.6% (sender-benefit) and 16.9% (recipient benefit). And in a lab experiment for personality type quiz with the sender being incentivized, the uptake rate was 28%; when the recipient was incentivized, it grew to almost 70%. Remember, all of this with the same rate of referrals, resulting in a major boost of new customer acquisition.


To demonstrate that often it is the cost of action that prevents referral programs from achieving high results, the authors of the study explored what happens with high-cost vs low-cost actions. As is to be expected, in the low-cost condition there was almost no difference in the number of people who followed through on the recommendation. In the high-cost condition though the recipient benefit program achieved double the uptake rate.





In short, because we care about our reputation referral programs offering an incentive for the recipient of the recommendation work as well as the ones incentivizing the sender at the referral stage. Because they minimize the action costs though they result in considerably higher uptake rate and are thus more effective for acquiring new customers.


My best wishes for a great day ahead!


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