The importance of friend incentives in referrals according to Harvard University et al

What harvard can teach you about referral incentives

Sometimes clients and prospects ask us whether they really need to give an incentive to a referred friend. As if giving an incentive will attract the wrong type of bargain hunting customer? Or, where you feel your product or service is high quality, then surely the recommendation of the friend should be enough? Particularly, if your service is invite-only, like a private shopping club.

Well, when it comes to giving a reward to your referring customer, we typically advise that you should do this, as it helps grease the wheels of referral marketing by offering a thank you for the effort involved. And, as highlighted in recent research by Yale and UC Berkeley, it helps overcome the social cost of referrals; the risk that the referral turns out to be a bad one.

But what about an incentive for the friend? Well clearly you SHOULD offer an incentive to the referred friend if you are offering sign up incentives through other channels. And that incentive should at least match what you can get elsewhere. Otherwise, you risk making your loyal referrer look a little silly when they refer a friend and get a response saying ‘thanks for the recommendation Bob, but I can get this cheaper on [VoucherSite]’.

Also, mentioned in the Yale and UC Berkeley research, having an incentive for the friend that is not available elsewhere creates an opportunity cost of not referring your friend. But, to our knowledge, there has been little academic research to-date on the importance of the friend incentive itself. So we were intrigued by the recent research by Cynthia Crowder of the Olin Business School, Rachel Gershon of University of California and Leslie K. John of Harvard Business School, that looked at whether “prosocial” (friend-benefiting) referral incentives were more effective at recruiting new customers than “selfish” (sender-benefiting) incentives.

In an experiment with the socially conscious dining app Giftameal, they emailed 6,354 customers and asked them to refer a friend to download the app, and tested different reward and incentive mixes including:

  • no monetary incentive for either party;
  • a $5 Amazon gift card for the referrer only;
  • a $5 Amazon gift card for the referred friend only;
  • a $2.50 Amazon gift card for each of the referrer and the friend; and
  • a $5 charitable donation to Feeding America.

Their research, which was confirmed in multiple follow up studies, found that the referrals were highest where all of the benefit went to the referred friend, which they ascribed to the reputational benefits of rewarding one’s social connections.

We find this very interesting, as it illustrates that you should never underestimate the social importance of being able to give your friend a good deal that is not available elsewhere. Of course, recommending a great product or service earns a certain amount of kudos with your friends, but the added benefit of a new customer offer can make that recommendation even more compelling.

Of course, the monetary rewards here were very small, and the response might be different if the rewards were up to US$100 or £100, as in some of the industries we work with, such as telecoms, banking, insurance and utilities. But the best response would always be to test different options with your customers.

If you would like to talk about the right rewards and incentives for your referral programme, we would be happy to chat.

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