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📝 Intro

Previous research found that referrals are powerful.

The average value of a referred customer is at least 16% higher than that of a non-referred customer.

So what is the most effective reward to encourage more referrals?

P.S.: Remember to pre-fill referral messages for your customers to make them even more effective.

Previous insight: When to use horizontal vs vertical product layouts (100+ more insights here)

Non-money rewards generate more referrals for lower costs

Channels: Referrals | Word of mouth
For: B2C. Can be tested for B2B
Research date: October 2013

📈 Recommendation

To encourage more referrals, don’t give money rewards to customers that refer you (e.g. Invite a friend and get $20, Earn a $5 discount).

Instead, offer non-money rewards such as a free extra product (e.g. an ebook for free) or more quantity (e.g. 1 extra bottle of wine, more data storage). It doesn’t have to be one of your own products (e.g. tickets to the neighborhood cinema).

If both the person referring and the invited friend get a reward, then money rewards should also work well.

🎓 Findings

• People are more likely to recommend a product to a friend when the referral reward they receive is not money (e.g. a t-shirt, tickets to a movie).

  • Non-money rewards work better and best when referral rewards are small (e.g. a few dollars worth) and the product’s brand isn’t strong

  • Money rewards work just as well as non-money rewards (equal value) if the product’s brand is strong (well known and high quality)

• For example, in a series of four experiments:

  • People were 35.9% more likely to recommend a hotel that didn’t have a strong brand when they got two movie tickets vs 50 Chinese Yuan (~ 8 USD). They were equally likely to recommend it if the brand was strong

  • 20.8% of customers of a hair salon referred it to friends when offered a small shampoo bottle. Only 7.5% did when offered the equivalent in cash (6 Yuan ~ 1 USD). When the brand was considered strong, referrals were higher and there was no statistical difference of reward type (40.4% and 36.5%)

• The effect reverses when

  • Money rewards are very high and expensive (but they attract unprofitable customers)

  • Money rewards are given to both the referrer and the referred (which makes the referral more altruistic)

🧠 Why it works

• In economic theory, $10 in cash is more valuable than a $10 coffee mug. So why does the mug work better?

• We recommend products to friends mainly for social, altruistic, reasons. We want to help them by referring something we think would benefit them.

• Money rewards change that: 

  • When money comes into play it switches us from ‘social mode’ to ‘business transaction mode’. We become more selfish, distant, less helpful, and less willing to be helped

  • So we get more suspicious about the motive of a recommendation. Are they using us for money? Are they that cheap?

  • Social relationships can be easily destroyed and never recover

  • We would rather not risk that, so we don’t refer the product

• Non-money rewards also slightly change social dynamics, because the recommender still gains something. But the social cost is nowhere near as drastic as when money is involved, so the incentive outweighs it.

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✋ Limitations

• This research tested only three non-money rewards: two cinema tickets (for a hotel), a shampoo bottle (for a hair salon), a glass of wine (for a wine store). They did not directly test rewards such as discounts or product upgrades. Given their direct monetary value (e.g. get $50 off) discounts might work the same way as cash rewards, while others could be considered non-money rewards. However, we don’t have direct evidence for this.

• Companies can ask people to refer them to a friend without offering a reward. We don’t know how that compares with offering different types of rewards.

• This research did not look at the quality of new customers that different reward types generate. Money rewards might attract more valuable customers, or vice versa.

🏢 Companies using this

• Most companies that offer referral rewards tend to offer non-money rewards. For example, business newsletter Morning Brew offers branded stickers and t-shirts.

• Banks are an exception. For example, digital bank Revolut offers cash for referrals. However, since the reward is tied to their main product, the effect might still be beneficial for them.

⚡ Steps to implement

• First, make sure you are reminding people to recommend you to friends, even if you don’t offer referral rewards. People easily forget to, and a simple reminder may already generate significant referrals.

• Set up a referral system. You can use third-party tools such as Viral Loops.

• Don’t make rewards too valuable (especially if cash). You will attract gradually worse customers the higher the reward.

• Instead, offer rewards that are related to your product (e.g. product upgrades, free mini-courses, merchandise if you have a fun brand).

🔍 Study type

Lab experiments and field experiment (on 418 customers of a hair salon in China)

📖 Research

When giving money does not work: The differential effects of monetary versus in-kind rewards in referral reward programs. International Journal of Research in Marketing (October 2013).

🏫 Researchers

• Liyin Jin. Fudan University

• Yunhui Huang. Fudan University

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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