A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood

AMA Publishing
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Gangseog Ryu & Lawrence Feick

Executive Summary
Because of the critical role of word of mouth in marketing (e.g., in new product introduction), firms are increasingly interested in understanding and managing it. Recently, firms have introduced referral reward programs designed to encourage product recommendations from existing customers. In these programs, firms offer various types of rewards (e.g., vouchers, gifts, free minutes or miles) when an existing customer attracts a new customer. This research uses four experiments to investigate the impact of referral reward programs on customers’ referral likelihood. The findings provide insight into the psychological mechanisms underlying responses to these programs and offer guidance on how such programs are most effectively structured.

First, the results show that offering a reward increases referral likelihood, but that the size of the reward does not matter, at least between the smaller and the larger reward sizes used in the study. This suggests that firms need to calibrate reward size carefully and compute the expected incremental sales revenue compared with the cost of alternative reward programs.

Second, the impact of reward programs differs depending on the type of social relationship between the recommender and the receiver of the recommendation. For a recommendation between strong ties (e.g., close friends), rewarding either the new customer or both the new and the existing customer can increase referral likelihood (though not by much), but rewarding the existing customer does not. Conversely, rewards are important for increasing referral likelihood between weak ties (e.g., casual acquaintances). In such cases, to increase referral likelihood effectively, the recommender should be rewarded. Marketers should calibrate the structure of the reward program to increase the reward as the number of referrals increases and/or by tilting the payoff toward the recommender for the subsequent referrals. This structure reflects the idea that the first referrals from a customer are likely be to family or close friends for whom the recommendation would probably have occurred anyway; it is likely that subsequent referrals, presumably to casual acquaintances, need to be encouraged.

Third, the results also show that firms need to consider the strength of their brand when designing referral reward programs. Rewards increased referral likelihood more for consumers of a weaker brand than for consumers of a stronger brand. Even if the company’s long-term strategic focus is on increasing brand strength, in the short run, weaker brands can use a reward program to increase referrals and perhaps product trials.

Biography
Gangseog Ryu is Associate Professor of Marketing in the College of Business Administration at Korea University, Seoul. He received his PhD from the University of Pittsburgh. His current research interests include word of mouth, referral reward programs, corporate social responsibility, and regulatory focus theory. His research has been published in Journal of Consumer Research, Psychology and Marketing, Advances in Consumer Research, as well as in Korean marketing journals. He teaches core courses in marketing and consumer behavior to both undergraduates and MBAs and has won the University teaching excellence award at Korea University.

Lawrence Feick is Professor of Business Administration in the Joseph M. Katz Graduate School of Business at the University of Pittsburgh, where he has been a faculty member since 1982. He previously served as the school’s associate dean, interim dean, and CIBER director. He teaches marketing management and international marketing and conducts research in the areas of consumer information search, international marketing, and word-of-mouth influence. Dr. Feick earned his PhD at the Pennsylvania State University. He has published articles in Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, International Journal of Research in Marketing, Journal of Retailing, Psychological Bulletin, and Public Opinion Quarterly. Dr. Feick has served as a consultant to several profit and nonprofit firms and has done extensive executive teaching. He is the coauthor of Country Manager, an international marketing simulation game. He has been a visiting professor at the University of Augsburg (Germany), Czech Management Center (Czech Republic), International Management Center (Hungary), Comenius University (Slovak Republic), and Universidad Santa Maria (Ecuador).  

Journal of Marketing, Vol. 71, No. 1, January 2007
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