Referral Reward Size and New Customer Profitability

Abstract

Managers use referral reward programs to stimulate positive word of mouth by rewarding existing customers for every new customer they successfully refer. A key decision variable in these programs is the referral reward size—but what are the effects of offering smaller versus larger rewards? Whereas previous research has studied the impact of referral reward size on the number of referred new customers, we, for the first time, investigate its effect on the profitability of referred new customers. We analyze a field experiment involving more than 160,000 bank customers and test the generalizability of the results with archival data from approximately 270,000 telecommunication customers. In both studies, we find that even though larger referral rewards lead to the acquisition of more new customers, they considerably decrease the profitability of referred new customers. Managers need to take both of these effects into account when deciding about their program design.