Customer referral reward programs have recently gained popularity as beneficial customer acquisition tools. This research aims to explore the impact of reward type, specifically with regard to the differential effects of monetary versus in-kind rewards, on referral success. We find that although consumers prefer monetary rewards to in-kind rewards because of the greater economic value of monetary rewards, the higher social costs associated with money offset this benefit and even render money an inferior incentive when the recommendation is not well justified. Through four experiments, we demonstrate that monetary rewards (vs. in-kind rewards) lead to less referral generation and acceptance, especially when the recommended brands are weak (Studies 1 and 4), and that perceived social costs mediate the interactive effect of reward type and brand strength (Studies 1 and 3). Moreover, by increasing the economic benefit or decreasing the social costs associated with monetary rewards, we restore the effectiveness of monetary rewards as incentives. Compared with in-kind rewards, monetary rewards perform equally well when the reward is sufficiently large (Study 2), and they perform even better when both the recommender and the receiver are rewarded (Study 3). This research extends the literature on the psychological consequences of money and provides novel insights into the customer referral process.
The long-term profitability and prospects of a firm depend on whether it is capable of acquiring the “right” customers and maximizing customer lifetime value (Kumar, Petersen, & Lenoe, 2010). Traditionally, word of mouth (WOM), which is recognized as an important customer acquisition tool, has attracted interest among practitioners and researchers (e.g., Godes and Mayzlin, 2009 and Iyengar et al., 2011). Numerous academic studies corroborate the effectiveness of WOM for gaining new customers (Godes et al., 2005 and Wangenheim and Bayón, 2007).
Pioneering firms have recently introduced referral reward programs (RRPs), which purposefully incentivize existing customers to make recommendations through WOM. Unlike organic WOM, WOM generated by RRPs is deliberately stimulated and actively monitored by firms (Schmitt, Skiera, & Van den Bulte, 2011). Generally regarded as an attractive customer acquisition tool, rewarded referral practices are widespread, appearing in industries ranging from financial services (i.e., ABNARMO Bank) to the automobile (i.e., BMW) and electronic device industries (i.e., Canon). A recent empirical study (Schmitt et al., 2011) confirms the benefits of the use of RRPs in marketing practices by demonstrating that the value of referred customers is 16% higher than that of non-referred customers with a similar profile.
Given the advantages of this stimulated WOM, a natural extension of existing research involves investigating how to design RRPs that are both effective and efficient. Although a few studies have taken steps in this direction (Kim et al., 2001, Kornish and Li, 2010 and Ryu and Feick, 2007), to our knowledge, no study empirically examines how the effectiveness of RRPs may vary as a function of reward type, such that certain reward types may be more effective in encouraging referrals than others. However, firms vary substantially in terms of their chosen reward type (i.e., cash, coupons, gifts, free products). The present study addresses this managerial issue and specifically contrasts the efficacy of monetary rewards with the efficacy of in-kind rewards of equivalent value in driving referrals for either strong or weak brands.
Conventional wisdom suggests that monetary rewards, because of their higher economic benefits, should be equally or more effective in motivating customer referrals than other types of rewards, as prior research (i.e., Biyalogorsky et al., 2001 and Ryu and Feick, 2007) on RRPs has unanimously assumed. However, we question this assumption and propose that the disadvantage of monetary rewards, namely the higher social costs associated with monetary rewards, may offset this monetary benefit and may even render monetary rewards as inferior incentives. Drawing on theories that investigate the psychological consequences of money as an incentive, we argue that monetary (vs. in-kind) rewards invoke market exchange norms rather than social relationship norms (Heyman & Ariely, 2004). Thus, monetary rewards increase consumers' perceived social costs by casting doubt on the altruistic nature of a referral. Moreover, monetary (vs. in-kind) rewards exacerbate this situation when the recommendation is difficult to justify. Hard money deters people from ill-justified or unethical actions because it leaves little room to interpret such behavior in a manner that neither threatens their self-concept nor amplifies the perceived social costs of appearing greedy to others (Mazar, Amir, & Ariely, 2008). In summary, the relative effectiveness of monetary and in-kind rewards depends on how the advantage of monetary rewards (with regard to economic benefits) compares with their disadvantage in terms of social costs.
We conducted four studies to examine the impact of reward type in RRPs. Study 1 tests our main hypothesis that the underperformance of monetary rewards relative to in-kind rewards is more pronounced when the recommendation is ill justified (i.e., for weak brands) and examines the role of perceived social costs as a mediator. Study 2 confirms the results obtained in Study 1 in a field setting and identifies reward size as a boundary condition. Study 3 further tests the proposed underlying mechanism by directly manipulating the recommenders' perceived social costs. In Study 4, we adopt the perspective of referred customers and analyze how reward type influences their referral receptivity. Next, we review the related literature and report our empirical studies.
Referral reward programs are key CRM tools because of their dual benefits of attracting new customers and retaining existing ones (Ryu & Feick, 2007). Therefore, it is critical to understand the psychological and behavioral drivers of customer referrals in facilitating the managerial optimization of targeted marketing campaigns and the subsequent maximization of customer referral value (Kumar et al., 2010). Previous studies have examined certain aspects of the design of referral programs (Kim et al., 2001 and Ryu and Feick, 2007). However, little research has explored the role of reward type in optimizing the efficiency of referral programs, particularly with regard to how different types of rewards affect customers' likelihood of referral and acceptance. The present study contributes to the literature by filling this theoretical and practical gap.
We used four studies to examine the differential effects of monetary versus in-kind rewards in driving referral success. In Study 1, customers who were asked to generate referrals in exchange for monetary (vs. in-kind) rewards were less likely to do so for a weak brand than for a strong brand. Furthermore, customers' perceived social costs mediated the interactive effect of reward type and brand strength on referral likelihood. In Study 2, we replicated our findings in a field setting and demonstrated that a sufficiently large reward could increase the relative benefits of monetary (vs. in-kind) rewards such that the higher social costs associated with monetary rewards could be completely offset, thereby eliminating the effects of reward type on referral likelihood. In Study 3, we found that rewarding both the giver and the receiver of the recommendation considerably decreased the perceived social costs associated with monetary rewards, making monetary rewards more effective incentives than in-kind rewards. In Study 4, we explored the other half of the referral dyad by demonstrating that referred customers who learned that a monetary reward was offered to recommenders were less likely to accept the recommendation for a weak brand than for a strong brand.
This study makes several contributions to the literature on WOM and the psychological consequences of monetary incentives. First, and at the most basic level, we extend the theory on the demotivating effect of money to a new context in which people are incentivized to accomplish a task that affects their friends and acquaintances. Although the underperformance of monetary rewards as an incentive has been tested in a variety of contexts, previous studies have focused on incentivizing people to perform actions that have consequences for only themselves or a psychologically distant group of people (i.e., blood donations) (Goette and Stutzer, 2008, Heyman and Ariely, 2004 and Lacetera and Macis, 2010). However, we demonstrate that the detrimental effect of money also exists in the context of social interactions (i.e., referral reward programs). We further identify the psychological mechanism of how monetary rewards undermine referral intentions when the need to send positive signals about oneself is involved. In a broader sense, this research also advances theories on incentives in labor economics (Bénabou and Tirole, 2003, Bénabou and Tirole, 2006 and Dur et al., 2010) as well as theories on the psychological consequences of money (Heyman and Ariely, 2004 and Vohs et al., 2006).
This study elucidates the motivations behind WOM and provides novel insights into the customer referral process. Prior research has focused on the intrinsic motivations behind WOM, such as satisfaction, trust, emotional reaction, and arousal (Berger and Milkman, 2012, Verlegh and Moldovan, 2008 and Wangenheim and Bayón, 2007). More recent research has focused on certain product characteristics that are conducive to the spread of WOM, such as the originality, usefulness, accessibility, and public visibility of a product (Berger and Shwartz, 2011 and Moldovan et al., 2011), as well as the role of social networks in facilitating information and product diffusion (Stephen, Dover, & Goldenberg, 2010). Recent work has examined how controversy affects conversation (Chen & Berger, 2013) and how the channels through which consumers communicate affect what they talk about (Berger & Iyengar, 2013). However, RRPs represent an active firm strategy through a reward system that strengthens the extrinsic motivations behind WOM. In this study, we explored how intrinsic motivation (brand strength) and extrinsic incentives (rewards) interactively influence the likelihood that customers will make referrals. Our findings suggest that the impact of reward type on incentivized referrals hinges on the intensity of the intrinsic motivation (i.e., sharing a quality product). Specifically, when there is a sufficient intrinsic motivation to make a referral (i.e., when the behavior is well justified), the type of extrinsic motivator exerts much less influence on the incentive efficiency because the intrinsic motivation dominates. However, if there is a lack of an intrinsic motivation, then the extrinsic motivation dominates, and in such a case, the type of reward affects the referral success.
Our research provides a note of caution to managers that money may be unexpectedly demotivating as an incentive in an RRP context. Although a sufficiently large reward has the potential to eliminate or even reverse the demotivating effects of monetary rewards relative to in-kind rewards, as shown in Study 2, offering rewards of considerable value is inefficient for most firms. This finding possibility highlights the importance of managers' awareness that although money appears to be desired by everyone, there is a potential downside to offering money as an incentive in RRPs. People may simply choose to opt out of programs that reward customers with money because the social costs associated with monetary rewards outweigh their economic benefits. It is important to note that if a firm is a new player in the initial stages of developing its brand capital, offering a monetary reward in an RRP not only undermines the efficiency of the program but also generates negative impressions regarding the firm's motives.
In-kind rewards also have a cost advantage over monetary rewards. A reward worth one dollar to a consumer may have different cost implications for the offering firm depending on the reward type. For example, cash is more costly for a firm than a product of the same value. As a result, in-kind rewards are more suitable for the purpose of RRPs. Nevertheless, as long as an extrinsic reward is provided, customers experience more or less distress caused by perceived social costs. Therefore, firms should take measures to alleviate such feelings of guilt. As demonstrated in Study 3, rewarding both the recommenders and the recipients of recommendations is one way to alleviate such feelings. Keeping the details of the rewards that recommenders receive confidential may also be a plausible solution. Alternatively, building up brand strength, such as by improving the quality of products and services, and nurturing brand awareness and a good public image may also reduce the perceived social costs associated with monetary rewards.
Despite the implications of our findings, we realize that the present research has certain limitations that may provide fruitful opportunities for future research. First, we concentrated on the effect of monetary and non-monetary rewards on perceived social costs and referral likelihood without considering the features of the consumer–firm relationship and the nature of the recommender–receiver dyad. For example, we expect consumers to respond differently to incentives depending on whether they make recommendations to close friends or casual acquaintances or whether they recommend a firm (product) to which they are loyal or a firm (product) with which they are unfamiliar. Therefore, we believe that it would be fruitful to incorporate these contextual factors into future research.
Regarding the reward type, we limited our attention to cash rewards and one type of in-kind reward, material goods. In reality, firms also offer other types of in-kind rewards, such as redeemable points, free products/services, and membership upgrades. Therefore, a deeper examination of the impacts of various types of in-kind rewards on referral success could constitute an interesting avenue for future research.
