Sometimes clients and prospects ask us whether they really need to give an incentive to a referred friend. As if giving an incentive will attract the wrong type of bargain hunting customer? Or, where you feel your product or service is high quality, then surely the recommendation of the friend should be enough? Particularly, if your service is invite-only, like a private shopping club.
Well, when it comes to giving a reward to your referring customer, we typically advise that you should do this, as it helps grease the wheels of referral marketing programs by offering a thank you for the effort involved. And, as highlighted in recent research by Yale and UC Berkeley, it helps a referrer overcome a psychological barrier to referrals; namely the risk that the referral could turn out to be a bad one. And Buyapowa’s Reward Revolution research found that fully 74% of people reported that they would be less likely to refer a friend if there was no reward involved.
Although, we definitely think that the reward should be fair and commensurate with the effort you ask of your referrer. The reward definitely shouldn’t be so generous that your customers quit their day jobs and try and advocate for you to anyone who will listen – if you want to do that, then you could look to affiliate or influencer marketing. By offering over generous rewards, you also risk encouraging participants to game the system. So the reward should be attractive enough to encourage a genuine referral, but not encourage unwanted behavior or risk ruining your business.
But what about an incentive for the friend? Well clearly you SHOULD offer an incentive to the referred friend if you are offering sign up incentives through other channels. And that incentive should at least match what you can get elsewhere. Otherwise, you risk making your loyal referrer look a little silly when they refer a friend and get a response saying ‘thanks for the recommendation Bob, but I can get this cheaper on [VoucherSite]’.
Also, mentioned in the Yale and UC Berkeley research, having an incentive for the friend that is not available elsewhere creates an opportunity cost of not referring your friend. Interestingly, our Reward Revolution research also found that 70% of respondents said that they wouldn’t act on a referral without a friend incentive.
Hear from Buyapowa’s Referral Experts whether you need a friend incentive in your referral program:
Referral marketing: Do friends need incentives?
Gideon Lask "All right, Peter, Robin, a very serious question okay? Does the friend always need to be incentivized. As a referrer, do I always have to say 'Peter you're gonna get something', 'Robin you're going to get something'?"
Robin Bresnark: "No, but it needs to at least be best in market. So if ordinarily, to a new customer, you're offering £10 off your first shop, you've really got to at least offer that, otherwise it's going to make the referrer look like a bit of a mug. 'Gids why don't you go to such and such shop and buy something. You go there and go 'oh well my friend sent me and I'm not getting this offer that I would have got if no-one sent me'. That's awful, so never do that. But doesn't need to be more than that, that's very much dependant on what brand or the product is."
Gideon Lask: "All right, any thoughts Pete?"
Peter Cunningham: I would say don't underestimate the importance of an incentive for the friend. Some research
Harvard did last year, a year or two ago, [where] they did some research and they offered people the choice between keeping all the reward, sharing the reward, giving all the reward or giving it to charity, and you know what? Actually most people gave it to their friend. So there is something nice about saying to your friend 'I'm recommending this product or service to you and I'm giving you a great deal."
Robin Bresnark: "Interestingly, I'll just jump in gender comes into play there as well, right. Because men and women refer very differently. So men generally they want to get something themselves, women generally want something for their friends. It's amazing, you would have believed it? So there's all kinds of things to think of. So you need to think what is your brand, what are you selling, what do you want people to think of you and then you need to tailor it."
Gideon Lask: "Brilliant, thanks guys."
But, to our knowledge, there has been little independent academic research to-date on the importance of the friend incentive itself. So we were intrigued by the research by Cynthia Crowder of the Olin Business School, Rachel Gershon of University of California and Leslie K. John of Harvard Business School, that looked at whether “prosocial” (friend-benefiting) referral incentives were more effective at recruiting new customers than “selfish” (sender-benefiting) incentives.
In an experiment with the socially conscious dining app Giftameal, they emailed 6,354 customers and asked them to refer a friend to download the app, and tested different reward and incentive mixes including:
- no monetary incentive for either party;
- a $5 Amazon gift card for the referrer only;
- a $5 Amazon gift card for the referred friend only;
- a $2.50 Amazon gift card for each of the referrer and the friend; and
- a $5 charitable donation to Feeding America.
Their research, which was confirmed in multiple follow up studies, found that the referrals were highest where all of the benefit went to the referred friend, which they ascribed to the reputational benefits of rewarding one’s social connections.
We find this very interesting, as it illustrates that you should never underestimate the social importance of being able to give your friend a good deal that is not available elsewhere. Of course, recommending a great product or service earns a certain amount of kudos with your friends, but the added benefit of a new customer offer can make that recommendation even more compelling.
“Don’t underestimate the importance of an incentive for the friend, some research Harvard did a year or two ago, where they offered people the choice between keeping all the reward, sharing the reward, giving all the reward or giving it to charity, and [they found] most people gave it to their friend. So there is something nice about saying to your friend ‘I’m recommending this product or service to you and I’m giving you a great deal’”
Peter Cunningham, Marketing Director – Buyapowa
Of course, the monetary rewards here were very small, and the response might be different if the rewards were up to US$100 or £100, as in some of the industries we work with, such as telecoms, banking, insurance, credit cards and utilities. But the best response would always be to test different options with your customers.
If you would like to talk about the right rewards and incentives for your referral programme, we would be happy to chat.