In our previous post about setting up your referral program incentives, we covered two sets of referral incentives to think about:
- Referral reward – a reward you give to an advocate who successfully refers his friends to your store
- Friend offer – a reward you give to the friend to encourage them to visit via the referral link and buy something from your store
We also talked about how it’s prudent to give discounts or credits to encourage future repeat purchases (for products like shoes), and cash discounts for one-off purchases (for products such as mattresses).
There’s still a pressing question with regards to how you allocate those incentives, though.
How should you allocate your referral incentives? Is it better to split the rewards, or give them all to one party?
To frame it in concrete terms, is it better to give $25 to each party, or is it better to give $50 to one of them?
Obviously it would be better still to give $50 to both advocate and friend, but if you’re willing to spend $100, then the question becomes– is it better to give $50 to each, or $100 to one of them?
A 2007 study by Pittsburgh and Korea University has some answers.
The study was conducted with approximately 300 mobile phone subscribers of 3 telco companies in Korea.
One telco was stronger (53% market share), while the other two were weaker (31.5% and 15.5% market share).
The subscribers were offered a choice between two referral programs:
- A one-sided Reward Me (approx. $50 in free calls)
- A two-sided Reward Both (approx. $25 in free calls to the advocate and friend each).
Note that the total value for each condition is the same: $50. (Also, they weren’t given the option of “Reward My Friend”, where they could forgo their reward to double their friends’.)
Here’s what the study found:
1: Offering a reward increases reported referral likelihood.
This is a no-brainer– incentives work, and people are likelier to do something if there’s an incentive to motivate them.
2: The impact of reward programs differs depending on the type of social relationship between the recommender and the receiver of the recommendation.
“For a recommendation between strong ties (e.g., close friends), rewarding either the new customer or both the new and the existing customer can increase referral likelihood (though not by much), but rewarding the existing customer does not.
That is, they found that close friends seem more interested in giving their friends a reward than in making money off their friendship.
“Conversely, rewards are important for increasing referral likelihood between weak ties (e.g., casual acquaintances). In such cases, to increase referral likelihood effectively, the recommender should be rewarded.”
So if you expect advocates to refer close friends, you’d want to reward the friend, or both parties.
If you expect advocates to refer primarily acquaintances, you’d want to reward the advocate.
Let’s look at some examples of two-sided referral incentives used successfully:
1. Airbnb – Advocates can earn up to $100 in Airbnb credits, while referred friends are rewarded with $25 credit.
Interestingly, Airbnb once tried out an A/B test on their promotional emails.
In one condition, the copy was “invite your friends, get $25”, which appealed to the advocate’s self-interests.
The messaging in the other email was “give your friends $25 to travel” which came an altruistic standpoint.
It turned out that the altruistic messaging performed better globally.
We figured that the intangible benefits from giving your friends $25 (earning a favor, seeming altruistic) was more valuable than simply giving themselves $25.
2. Dropbox – 500 MB cloud storage space for every friend who signs up, up to 16 GB.
Perhaps one of the most well-known referral programs, Dropbox gave advocates and referred friends 500 MB of free storage space each.
Advocates can earn up to 16 GB of space, which is huge.
3. Uber – $10 – $30 in ride credits for use in future trips.
Uber offers a host of different referral programs for their customers, both drivers and riders alike.
Their most popular referral program rewards riders with cash credits (varies from $10 to $30) when their friends sign up for an Uber account. Their friends are also rewarded with credits, which they can use for their first trip.
4. Greats – $10 store credit for advocates and their friends to get more kicks.
5. Dappertime – You get $10 cash when your friend buys something, while he enjoys a 10% discount.
The folks at Dappertime decided to go with real cash because it would be something interesting, and something their customers would gladly receive:
We knew our customers would respond to cash payouts. It’s a very human thing – everyone wants money! Shoppers are burned out looking for stuff and getting marketing emails that want them to buy more; so we give cash instead.
6. You Need A Budget (YNAB) – Both advocate and friend gets $6 cash each, which is worth 10% of their product.
YNAB is a one-time purchase, so giving out cash to reward advocates and referred friends makes sense.
7. 22 Days Nutrition – Advocates gets 15% of their friend’s first purchase in cash, while the friend gets 10% off for that purchase.
Prior to having a referral program, 22 Days Nutrition was already enjoying organic word-of-mouth referrals from their fans.
Giving them a slightly higher referral reward might be their way of thanking fans for spreading the word, and to motivate them to keep up the good work!