Referral Contagion: Downstream Benefits of Customer Referrals

Companies often invest in referral reward programs to incentivize their current customers to spread word of mouth. Previous work has documented that referred customers tend to be more valuable than nonreferred customers through their purchases or engagement with the company. The authors propose a previously overlooked benefit of encouraging referrals: Referred customers are also more valuable because they make more referrals. Using a large-scale field dataset, the authors show that referred customers make 31%–57% more referrals than nonreferred customers conditional on purchase activities. Using preregistered lab experiments, they replicate the main effect and propose one underlying mechanism: Referred customers perceive referring to be more socially appropriate than nonreferred customers do. In a field experiment, the authors build on previous work on norm salience and show that reminding referred customers that they joined through a referral further boosts their referral likelihood by 21%. These results advance the understanding of the social motives that contribute to referral decisions and illustrate that promoting referrals is substantially more valuable than previously estimated.