Effective referral reward programmes in the digital era

The next time your bank or your hairdresser offers you a reward for recommending its services to people in your network, take a minute to assess your reactions.

Are you tempted to scroll through your contacts, looking for names to target? Or do you hesitate, concerned about the impression the recipients of your recommendation will make of you for accepting a reward?

Now let’s add a digital dimension to this dilemma: Would your concerns recede if you were to make your recommendation over the Internet rather than in person?

Understanding how we as consumers react in these situations is crucial for determining the effectiveness of referral reward programmes, or RRPs, especially as they proliferate online.

The explosive growth of social media – a platform unheard of little more than a decade ago – has extended the reach of businesses in the quest for new customers, and with that has come a plethora of new tactics for building brand advocacy.

An offshoot of word-of-mouth recommendations, RRPs have been around for decades. They are based on the principle that satisfied customers are the best ambassadors for the business and that people trust advice from those they know and tend to act on it.

Tupperware pioneers

Traditionally, RRPs worked in a direct contact social setting. An early example was the Tupperware party hosted for friends and neighbours by a consultant – often a housewife – who then got free products based on the sales made at the party.

Today, referral programmes are increasingly likely to reside on the internet.

For example, your favourite restaurant may offer you a discount for posting a recommendation on Facebook. Music streaming service Spotify offers a free month of their premium service to a user who gets a friend to sign up for the premium free trial.

With links to email forms, Twitter and Facebook, companies make it as easy as possible for customers to suggest their services to friends and others in their networks.

But despite their booming online presence, RRPs have so far been studied almost exclusively in the offline, or real world, context.

In a working paper based on two studies, we show that the factors that influence referral behaviour work somewhat differently online. Factoring in these differences can improve the design of referral programmes so that they become much more effective.

It’s all about metaperception

Although RRPs emphasize the incentive, our research has found that an underlying factor known as metaperception is more crucial in determining motivation.

carrot280Does the incentive offered deliver the right return?In social psychology, metaperception is essentially defined as what we think other people think of us based on how we think those others read and interpret our behaviour.

In general, our assessment of how others see us is pretty accurate – as we receive constant feedback not just verbally but also through tone of voice, facial expressions, and body language.

In the case of RRPs, metaperception refers to how a person perceives their recommendation will affect the recipient’s view of them.

When we recommend something, we want the other person to be as satisfied as we are with the product or service. However, adding an incentive creates conflict as the desire to help comes up against the worry that the recipient may question the individual’s motive for making the recommendation.

Our studies show that incentives may even backfire if metaperception is negative, that is, if a person thinks that making an incentivised recommendation will create a bad impression.

Take, for instance, a finance professor who would like to recommend an online broker to a colleague because she truly believes in the broker’s quality.

Now, if the professor was offered a significant reward for making that recommendation, she may become so concerned about the perception of vested interest that she may avoid making the recommendation at all.

Tie strength

Besides the incentive itself, another influence on metaperception is the strength of the ties between the recommendation giver and the receiver – as well as the communication medium used, whether offline or online.

For an RRP to be truly effective, it should be designed so as to reduce metaperception concerns – especially if the goal is for it to reach a customer’s broader network

Our studies show that in the case of online interactions, metaperception has less influence.

That seems to be because, with the computer or device screen acting as a kind of shield, worries about losing credibility or appearing untrustworthy for accepting a reward are reduced. Similarly, users don’t have to face the challenge of deciphering non-verbal cues.

On the other hand, in a face-to-face setting, impressions – verbal and non-verbal – are of great importance.

This difference plays a major role in determining whether a recommendation goes to a small group of close friends and family, or to a wider audience.

execprogramme-referralOur past research has shown that whether recommendation givers think they will be viewed in a positive or negative light depends partly on the nature of their relationship with the receivers of the recommendation.

Strong ties, such as close friends and family, are more likely to have positive metaperception than weak ties, even when incentives are involved, irrespective of whether the referral is made offline or online.

In other words, there is less conflict in making a recommendation that comes with a reward to a close friend or relative because the established level of trust bolsters the view that the recommendation is sincere.

When ties are weak, as they tend to be with casual acquaintances and colleagues, there is concern that recipients may doubt the motives and view the recommendation as less credible.

Our studies establish that with weak ties, the preference is to recommend online.

Besides the distance created by the computer or other device, respondents also felt online referrals would be less intrusive and obvious as the recipient of the referral could easily delete or ignore the message.

Effective incentives

RRPs for use online should be custom designed for that environment rather than adapted from existing offline programmes

For an RRP to be truly effective, it should be designed so as to reduce metaperception concerns – especially if the goal is for it to reach a customer’s broader network, including their weak ties.

One way to achieve this is by altering the nature of the incentive. For example, vouchers for the firm’s products may be more acceptable than a cash incentive.

Businesses should also consider sharing incentives between the recommendation giver and the recipient, while RRPs for use online should be custom designed for that environment rather than adapted from existing offline programmes.

For instance, online RRPs could use easy-to-forward messages and provide links to social network platforms and other online sources with supporting information about the offer, the product or service, its features, and even the business.

The respondents in our study felt that such additional information would enhance the credibility of referrals.

Our studies also show that firms should avoid trying to incentivise customers that have a strong need to create a positive impression – as in the case of the finance professor.

Variable benefits

In another example, we came across the case of a manager of an MBA programme who suggested giving a high-end fountain pen to every alumnus who successfully recommended someone to the programme.

This triggered a strong response from the MBA advisory board. Members were unanimous that while they wanted to help the programme and would recommend the programme anyway, they definitely did not want to be seen as benefiting in any way from doing so.

In such cases, it may be better for firms to emphasise the other less tangible and less materialistic benefits of making recommendations, such as the gratification of helping the alma mater, a cause, or a friend.

For instance, a major bank found that its private wealth business benefited more from word of mouth between strong ties than incentives because customers were more motivated by the need to be viewed as competent by this group.

Rewarding the new customer is another way to help the recommender’s need to create a good impression.

In general then, RRPs are best targeted at strong ties rather than weak ones.

Where weak ties are involved, firms should tread carefully in the programme design stage to ensure that the incentive outweighs any negative metaperception.

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