Companies can increase word-of-mouth referrals by existing customers and also the resulting conversion rate of new customers — each by 86% — based on how incentive offers are presented, notes Ravi Bapna in this opinion piece describing his new research. He is a chair professor in business analytics and information systems at the University of Minnesota’s Carlson School of Management.
A recent family biking vacation in the Dolomites region of Italy had my family and I all swept up in the charms of Northern Italy. Snow-capped peaks near the Austrian border, endless apple orchards, award-winning Chenin Blanc and quaint Italian villages with healthy doses of affogato (strong espresso coffee meeting with gelato is sheer genius) made the 250 kilometers fly by. By the time we ended our trip in Riva del Garda and got back Stateside, we were mentally separated from the harsh Minnesota winter and ready for the summer. We couldn’t stop talking about the outfitter (Scottsdale, Arizona-based Pure Adventures) that arranged this active vacation.
However, when my wife got an email with a $500 referral incentive from them she was reluctant to exercise it, despite many colleagues expressly asking us about the company that arranged this trip. She did not feel comfortable getting a substantial reward for something her friend or colleague did. Therein, lies the conundrum of getting referral marketing to work. To be clear, Pure Adventures had the right idea to try to use existing, ostensibly delighted, customers to acquire new customers. The nuance lies in how to activate and even accelerate this process using financial incentives, when at its core, it is primarily an intrinsically motivated action.
Achieving word-of-mouth (WoM)-based diffusion of products and services has long been a holy grail marketing objective. It’s potential appeal has multiplied in the age of influencers and virality offered by billion-people-plus social media platforms. Companies such as Uber and Dropbox have grown significantly using financial incentives in the form of referral rewards to accelerate WoM. “Invite a friend to try this product and get $20 off your next month’s bill,” said a mobile company to me recently. However, a vast majority of referral programs deliver little or no incremental value. It turns out that using extrinsic (financial) incentives (referral rewards) to accelerate what is inherently an intrinsically motivated organic process (WoM) is akin to mixing oil and water.
“The pro-social framing significantly increases (by 60%) the probability of a sender making any referrals, increases the total number of referrals by 86% and increases the conversation rate of new customers by 86%.”
We resolve this conundrum by advocating for, and demonstrating the efficacy of, pro-social and altruistic calls-to-action in referral marketing. When companies invoke their existing customers to do something that benefits their friends, rather than benefiting themselves, we see more referrals being sent out and more conversions from better customers. “Invite a friend to try this product and gift her $20 off her first bill!” should have been what the mobile company said to me recently.
My co-authors (Jae Jung, Tianshu Sun and Joe Golden) and I demonstrate, in a paper forthcoming in Information Systems Research, how firms can benefit from framing calls-to-action for referral programs in such a way as to move closer to the original intent of organic, intrinsically motivated WoM marketing, and yet at the same time reap the benefits of using a financial incentive to increase referral rates. In particular, given a fixed incentive scheme and ceteris paribus (other conditions remaining the same), we show the efficacy of a pro-social call-to-action over some of the more commonly used calls-to-action observed in practice. We posit, and causally demonstrate via a large-scale randomized field experiment involving 100,000 customers of a large e-commerce platform, that an intrinsically pro-social element in framing the call-to-action to initiate the referral process is a necessary condition for success.
The results show that, relative to the control group, the pro-social framing significantly increases (by 60%) the probability of a sender making any referrals, increases the total number of referrals by 86% and increases the conversation rate of new customers by 86%. This is achieved by a simple, but principled, play on words that emphasizes the benefit to others over the benefit to self. It shows that companies can benefit themselves if they bring out the altruistic side of their consumers.
We find that when firms use pro-social call to actions in referral marketing it leads to significantly more referrals made by senders, and significantly more conversions and dollars spent by newly acquired customers. We also uncover the mechanisms that lead to these findings. Subjects in the pro-social group report lower levels of guilt associated with sending a referral and are more able to identify the benefit to family and friends as a motive for sharing referrals, and therefore, are more selective in sharing a referral message.
“… Everyone benefits if the actions we take as individuals, firms or nation states are geared to invoke the best in others.”
While the context of our research shows the value of altruism in acquiring new customers via word-of-mouth, the lessons we can draw are broader. They apply to individuals seeking to influence others in their daily lives and potentially even to nations looking to be shining cities on a hill with a greater purpose beyond their selfish national interest. We posit that everyone benefits if the actions we take as individuals, firms or nation states are geared to invoke the best in others.
We live in interesting times where technological advances and digital social platforms have massively increased connectivity across the globe. However, concomitant with this is increased societal fragility, not higher social cohesion, increased income inequality, and not equitable distribution of wealth, and increased social isolation and burnout rather than an enhanced sense of community.
While business as a force of good is an idea that we tout and believe in, more work is needed to rigorously demonstrate how we achieve this. After all, all of us on the planet are located somewhere on the spectrum of caring about ourselves (egocentricity) versus caring about others (altruism). Little steps by companies that have millions of consumers who they like to engage with to nudge people further along to the altruism side can add up to a lot of societal benefit.