Referral Programs: Who Should You Reward?
In a previous post, we found out that referral programs bring you better customers and also brings in the dough. Now that we know a customer referral program is beneficial, the next order of business is to decide what kind of customer referral reward scheme to implement.
There’s been some recent research by the good people from the University of Pittsburgh and Korea University on this issue (pdf here). They examined how different referral reward schemes affected referral likelihood.
Some background to start with:
The study examined the effect of brand strength on two common types of reward schemes, a “Reward Me” scheme in which the recommender (the existing customer) receives the reward, and a “Reward Both” scheme in which both parties (the existing customer and the new customer) are rewarded.
Two levels of brand strength were pitted against each other; stronger brands versus weaker brands. Stronger brands are brands that are well-established and have high brand awareness. Consumers of stronger brands feel more brand commitment to the brand than consumers of weaker brands.
298 mobile phone subscribers using different mobile services in Korea were examined. There are three major mobile services in Korea, the leading brand having 53% market share and the two follower brands having 31.5% and 15.5% share. The leading brand was used as the stronger brand, while the two follower brands were used as weaker brands.
The subscribers were told that their mobile phone provider was embarking on a referral reward program. The reward was 60,000 Korean won in free calls (about $50 at the time of the study) in the Reward Me condition or 30,000 won in free calls each in the Reward Both condition.
They were then tested for whether they would refer their phone service for the different reward schemes.
What they found:
The results were condensed into a chart shown below.
Off the bat, we see that there are some significant differences in referral likelihood between stronger brands and weaker brands for different schemes.
For weaker brands: Referral likelihood increased by large margins when rewards were introduced (for both Reward Both and Reward Me schemes). The Reward Me scheme fared slightly better than Reward Both.
Researchers explained that consumers of weaker brands care a lot about what they get out of the referral as they tend to be more price sensitive. This perception caused them to be more attracted to the reward scheme where they gained the most, which was the Reward Me scheme.
For stronger brands: The Reward Both scheme performed a lot better compared to the Reward Me scheme. Now this is surprising. The consumers of stronger brands did not seem to care about the higher reward they obtained for referrals in the Reward Me scheme! What is going on here?
Researchers think this counterintuitive result is due to existing customers having a high affinity for the brand and are already willing to make the referral. By offering a larger reward to referrer, it makes it seem like they are in it for the money. Additionally, the study showed that consumers of a strong brand tend to be less price sensitive. So the bigger reward in the Reward Me scheme didn’t increase referral likelihood as it was seen as less important.
How does this apply to me?
This study only looks at referral likelihood, which represents just one dimension of customer referral programs. In reality, there are other dimensions to consider (such as how to ensure that referrals result in a purchase).
However, there are still some clear practical takeaways that we can obtain from this. First off, it’s clear from the study that rewarding customers for referrals improves referral likelihood over not rewarding them.
Secondly, the strength of a brand affects how customers react to a referral program.
So which type of reward scheme should you choose?
For newly launched brands: Choose either the Reward Me or Reward Both scheme. If you go with a Reward Both scheme, the study suggests that you should give bigger rewards to your existing customers. They tend to be more price sensitive and doing so might increase referral likelihood significantly.
For stronger, established brands: A Reward Both scheme is the clear choice. The study shows that your existing customers tend to be less price sensitive, so this means you should skew rewards to new customers and downplay the rewards to your existing customers.
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