One Simple Tweak Can Make Referral Programs More Effective

Journal of Marketing Research Scholarly Insights are produced in partnership with the AMA Doctoral Students SIG – a shared interest network for Marketing PhD students across the world.

Have you ever considered taking advantage of a “refer a friend” offer? Companies across a wide range of industries—such as banks, hotels, fashion and beauty products, ridesharing, and telecommunications—frequently run customer referral programs as a cost-effective way to acquire new customers. Referral programs often provide incentives to both the existing customer (i.e., referrer) and the customer’s friend (i.e., referee) contingent on the friend’s acceptance of the offer (e.g., placing an order, subscribing to the service). For example, as of October 2023, the Discover Refer a Friend program awards both the referrer and the friend statement credits ranging from $50 to $100, and Marriott’s program offers 2,000 bonus points to both parties for each of the referred friend’s initial five hotel stays.

Your first inclination when hearing about such simple and lucrative offers may be positive and egoistic, but the more you think about it, the more you might feel guilty and perceive the action of sending the offer to your friend as negative and against communal norms, potentially putting your friendship at risk.

Indeed, in a recent Journal of Marketing Research article, authors Minzhe Xu, Zhihao Yu, and Yanping Tu find that when a company solicits existing customers to refer a friend through mutual rewards, participation rates are minimal and actual conversion rates are as low as 4%. They argue that existing customers (i.e., referrers) do not solicit these types of offers to their friends because the symbolic nature of mixing financial rewards with friendships results in feelings of discomfort, guilt, and other unfavorable emotions.

What Can Companies Do?

Currently, to facilitate the referral process, many companies generate automatic invitation messages that referrers can easily share with their friends via email, text, or social media. Interestingly, although most referral programs reward both the referrer and the friend, most invitation messages do not mention the referrer reward. The researchers conducted a survey of 45 referral programs from nine industries, revealing that only seven programs incorporated information about the referrer reward in the invitation message (e.g., “it’s a beautiful win–win”). Inconsistencies in reward disclosure exist not only across companies but also within companies. For example, Airbnb included the referrer reward in its invitation message via the email channel (“I’ll get $20 in travel credit, too”) but not the text channel.

The research contains seven studies that evaluate why consumers are hesitant to refer friends and how a business may improve the referral process to increase the referring rate, conversion rate, and overall sales. By disclosing the referrer reward in the invitation message forwarded to friends, the psychological barriers for the referrer can be negated, providing significant benefits to the business.

By disclosing the referrer reward in the invitation message forwarded to friends, the psychological barriers for the referrer can be negated, providing significant benefits to the business.

However, the authors include one caveat: the reward amount and structure matter. Sharing the referrer reward is not helpful if there is an inequality in the reward amount (i.e., if a higher reward is offered to the referrer) or if the reward process puts unequal responsibility on one recipient, such as if rewards are based on the referee’s spending. Either of these situations may highlight that the incentive structure is incompatible with friendships.

The authors provided further insights in a brief interview about their study:

Q: What challenges did you face while examining this topic? To what extent, if at all, did these challenges influence research outcomes or implications?

A: One challenge we faced was testing the effect of disclosure on the referees’ acceptance rate in the real world. Because the number of referees depended on how many current customers sent the referral invitation, the number of referees differed between the conditions, making it difficult to conclude how disclosure affects acceptance. This might be one reason why disclosure did not have a significant effect on the acceptance rate in the field studies, so we conducted lab studies to further test the effect of disclosure on acceptance.

Q: The study mentions reputational benefits from a referee’s perspective. Do you think the referrer’s brand affiliation (i.e., high vs. low) would influence the likelihood of sending a referral?

A: We speculate that current customers with a higher (vs. lower) level of brand affiliation are more likely to send a referral invitation to their friends, and the reasons can be multifold. For example, consumers with a higher level of brand affiliation may have better attitudes toward the brand and thus may be more likely to refer. It is also possible that when consumers feel more affiliated with the brand, they see the brand as a friend and thus perceive sending a referral invitation as helping the friend, which increases the referral likelihood.

Q: Some nonprofits reward donors for certain participation levels (e.g., gold-level donor status or t-shirts for blood donations). How do you see applying the reward disclosure in donor referrals to the nonprofit realm? Do you think the altruistic/egoistic nature of the donation would impact or diminish the psychological barriers (i.e., discomfort, conflict, guilt)?

A: In the donation domain, suppose a referral offer indicates that if a current donor invites a friend to donate and their friend indeed makes a donation, both the current donor and their friend can get a reward. Our disclosure effect may attenuate since some current donors may see inviting a friend to donate as a prosocial, rather than exchange, activity and thus may not feel the psychological barrier.

Q: How would materialism and exclusivity impact a referee from soliciting a shared reward for a luxury product?

A: On the one hand, current customers may see owning a high-exclusivity product as indicative of their high status relative to others and want to maintain their status, causing a negative main effect of product exclusivity on the referring likelihood. On the other hand, current customers may perceive a high-exclusivity product as more helpful to friends, causing a positive main effect of product exclusivity on the referring likelihood.

Q: What do you think the process is for the referrer when they first see the refer a friend reward offer? Do you believe a different emotion exists before the psychological barriers to communal behavioral requirements occur? Do you think they automatically think negatively when they see the offer and the disclosure changes their emotions?

A: Our theory posits that upon learning about an incentivized referral program, referrers tend to perceive the referring action as an exchange activity incompatible with the communal norms regarding the interaction between friends, leading to negative feelings (a psychological barrier). Our finding suggests that consumers generally experience the psychological barrier when faced with a referral program offer, but some consumers may have feelings other than the psychological barrier, which also affect their referring intention. The initial negative reaction toward referral programs may be automatic or deliberative, possibly determined by individual experience, product characteristics, and the context in which the referral program offer is encountered.

Q: How would you incorporate this study with future marketers in an educational setting, such as a classroom or marketing training?

A: One takeaway of this research, specifically about the design of referral programs, is to disclose the referrer reward in the invitation message, which we found could benefit multiple aspects of the referral process (e.g., the referring likelihood, the acceptance likelihood, and the conversion rate). This strategy and its boundary conditions can be incorporated into marketing training about referral programs. Another takeaway of this research, more broadly about social relationship marketing, is to better align a marketing campaign, which involves consumers who are friends, with communal norms. This general suggestion can also be added to related marketing training programs.