Can a single-sided referral program work just as well as a double-sided program? Should you reward the referring customer, the referred user, or both?
To help answer these questions, we’re thrilled to welcome guest Rachel Gershon to The Advocacy Channel. As the assistant professor of marketing at the Rady School of Management, University of California, San Diego, Rachel’s teaching and research specializes in the realm of consumer behavior and human decision-making. Her published article, “Why Prosocial Referral Incentives Work: The Interplay of Reputational Benefits and Action Costs”, dives into the psychology of referrals and rewards, and what encourages customers to participate.
In this episode, host Will chats with Rachel about her innovative research on referral program reward structure. They discuss her game-changing findings and insights, and share new ideas when it comes to designing and sharing a winning referral program that converts.
Listen to the full podcast episode below, or keep reading to learn our three favorite take-aways from the episode that will help elevate your referral marketing strategy.
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What kind of reward structure gets the best results in a referral program?
One of Rachel’s research endeavors centers around human behavior when it comes to why and how we participate in customer referral programs. If you’ve been involved in designing a program before, you’ll know that deciding who to reward, and with what, is one of the biggest questions you’ll need to answer. Do you reward the referring user and the referred user, or just one of them? If just one, then who?
The most widespread approach is to reward with a double-sided structure, commonly seen in give/get referral models like “Give $10, Get $10”, to make the reward equal for everyone involved. Rachel’s research dove into whether a pro-social incentive (ie. a referral program where only the new, referred customer gets rewarded) could be just as effective as a shared incentive.
Rachel shares what the data revealed and whether a single-sided program can work just as well as a double-sided referral program.
When people think about creating referral programs, you think about getting the ball rolling, by getting your customers to refer. So in order to get someone to do that first action, we use incentives. So it makes a ton of sense that we want to offer an incentive to get that first step of the referral process going, and get your customers to spread word of mouth.
But there are two steps to the process: getting your customer to refer, and then also getting the recipient to follow through on the referral. What we were able to find with our studies is that offering an incentive for making a referral can provide just as much motivation as offering an incentive for their friend. And that’s because there are two different factors involved:
- Either your current customer gets a reward for themselves, or
- They receive a reputational benefit.
In other words, either you get a reward, or your friend thinks that you’re a nice person. And we actually don’t know through our studies whether your friend really thinks that, but we know that referers think that their friends will think more highly of them.
And then we have the recipient behavior. And the recipients have the harder job, since they either have to purchase a product or sign up for a mailing list, etc. This means the incentive is more important on their side. So what we find is, there’s no difference at the referral stage. And then recipients are more likely to follow through if they receive a reward.
When compared to a single-sided program where only the referring customer was rewarded, Rachel discovered that referral conversions were actually higher when the referred friend received a reward (ie. a pro-social reward). This means if you’re only going to reward one user, it would be more effective to reward the recipient of the referral, as opposed to the sender. Plus, her data found no difference in conversion rates between this single-sided approach and a classic double-sided program where everyone gets rewarded.
When should you offer an incentive to get the most valuable referral conversions?
It’s common practice for brands to offer a referral program to anyone and everyone – sometimes even to people who have never made a purchase or signed up before. While this does increase your chances of getting more referrals, Rachel found that most customers tend to make referrals early on, and these referrals may not yield the most valuable conversions.
So should you open your referral program to everyone who is willing to participate? Or only offer it to active customers or a specific group of partners?
From working with a large field partner, we were excited to see that most referrals happen within the first few weeks of a customer signing up for the service. But those are not the most valuable referrals.
So in terms of when we offer an incentive, brands could consider not starting to offer an incentive until you’ve been with the company for a month (for example). Because those early referrals tend to be people who just want the reward, and aren’t necessarily very familiar with the product and don’t know which friends to invite.
Absolutely. We see quite often people asking the question of, should I just offer this referral program to anyone who comes to the website, or whoever can make a referral? Or should I only offer this to active customers or a specific group of partners? And it sounds like, at least with this one example you’re talking about, the answer is not even just all customers, it might be actually to customers that have hit a certain mark, where you’re now comfortable that they’re going to properly bring in valuable new customers to your business.
Yeah – perhaps offer the ability to refer customers using a pro-social reward or not any incentive at all when the customer originally joins, and then once they are a loyal customer, offer a larger or different reward.
For example, Blue Apron doesn’t offer the ability to refer unless you’ve used the product for a while. They use a pro-social reward and offer the ability to send your friends meals for free once you’ve been with them for a certain period of time.
Are referred customers more valuable?
There’s plenty of research pointing to the fact that referred customers are more valuable: Referred customers are 18% more loyal, spend 13.2% more and have 16% higher lifetime values than non-referred customers.
But to add from Rachel’s findings, referred customers are also more likely to refer someone themselves, making this channel even more worthwhile.
What might be the psychological reasons behind this? We checked in with Rachel to get a sneak peek into some of her upcoming research to find out her theory.
I’m working with a colleague at Wharton on a project right now, where we just found with a couple of field partners, that people who join through a referral are also more likely to refer. But we’re interested in not only are people more likely to refer, but why.
The uninteresting explanation would be that people who join through a referral are part of a social network that is more likely to refer and is more extroverted. But a more interesting explanation would be that joining through a referral somehow makes it more socially acceptable to send a referral in the same context.
And what we find in controlled lab experiments, is that when you randomly assign people to have either joined a company through a referral or through an ad, they become more likely to send a referral themselves if they joined through a referral. And we look at why, and there’s a few reasons:
- They feel that it’s more appropriate,
- They feel lower psychological cost and so less discomfort, and
- They feel that the product will be a better fit.
Want to know more? To hear even more insights from Rachel’s research on referral programs and referral rewards, and how they can help you build a better program, check out the full episode anywhere you listen to podcasts. Special thanks to Rachel Gershon for being on the show!
To connect with Rachel and learn more about her research and findings, visit her website: https://www.rachelgershon.com/
Got questions or feedback about the podcast? Send us an email!