A new study reveals that customer referral programs can sometimes backfire: customers are less likely to recommend innovative products when they are rewarded for finding new customers. The study explores the reasons for this surprising negative impact.
The typical customer referral program offers a monetary reward for customers of a product or service who find other customers to buy that product or service. In most cases, the referral program is public: that is, the recipient of the referral knows that the person who recommended the product is being compensated for the referral. This happens, for example, when new customers must provide the names of the customers who referred them in order for that referring customer to receive the compensation. Some customer referral programs are private, however: the new customer does not know that the person who recommended a product or service will get compensated for the referral.
With new product failure rates ranging from 30% to 60%, any marketing initiative that can attract new customers to a new product would seem to be recommended. However, are customer referral programs always effective in getting customers to recommend products to others?
New research has revealed that customer referral programs can have dramatic unintended consequences: they can, in fact, decrease the likelihood that a customer would recommend a product, especially innovative products, to other potential customers.
Specifically, the research showed that:
The research was based on a field study in which a survey was emailed to 450 customers of an online store who recently purchased a product. The survey included questions about the innovativeness of the product and the chances the buyers would recommend the product. The survey also included questions designed to measure the participants’ desire for self-enhancement.
In addition to the field study, the researchers conducted controlled laboratory studies using participants from a marketing research firm’s online panel. These studies offered various hypothetical products or services, and manipulated the innovativeness of the product or service, as well as different details about the promotion: public, private or no reward at all; size of compensation; and whether or not both referring customers and recipients of the referral are rewarded. As in the field study, the laboratory survey questions measured the participants’ likelihood of recommending the product or service and their desire for self-enhancement.
The study has several important implications for marketers concerning customer referral programs:
Unintended reward costs: the effectiveness of customer referral reward programs for innovative products and services. David B. Dose, Gianfranco Walsh, Sharon E. Beatty & Ralf Elsner. Journal of the Academy of Marketing Science (May 2019).
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