The Science Behind a Successful
Referral Program
Presentation by Lance A. Bettencourt, PhD
Associate Professor of Professional Practice
Texas Christian University

A referral program is a way to encourage
positive word-of-mouth by rewarding customers
for making recommendations to friends and
other acquaintances!

Referral programs are popular and varied!

• Prior to the referral program, the Dropbox cost per customer acquisition was $288-$388. Their product was $99/year.
• So Dropbox added a referral program in which both the referrer and their friend are rewarded with extra storage space.
• The results:
• In 15 months, registered Dropbox users went from 100,000 to 4,000,000
• 35% of daily sign-ups were via the referral program
SOURCE: http://www.referralcandy.com/blog/47-referral-programs/
Dropbox grew quickly via a referral program!

Referral programs should be evidence-based!
Anecdotal success stories are
nice, but decisions based on
evidence are preferred.
In fact, the evidence
provides clarity because
companies make distinct
choices about who to
reward, how to reward, and
so on.
Example Design Questions
Answered by Research
• Why is a referral program
beneficial?
• Who should be rewarded?
• What should the reward be?
• How much should the reward
be?
• Should the reward vary?
• How should the program be
promoted?

SOURCE: Schmitt, Philipp, Bernd Skiera, & Christophe Van den Bulte (2011), “Referral Programs and Customer Value,” Journal of Marketing, 75 (January), 46-59.
What Research Shows
• An analysis of 10,000+ banking
customers acquired via a
referral program (n=4633) or
other means (n=5181) showed
that referred customers are
15% less likely to churn and are
25% more profitable.
• The ROI of the referral program
was 60% over 6 years!
Practical Takeaway
• A referral program is a good
investment despite its costs
and risks. It attracts high
customer lifetime value (CLV)
customers.
• A referral program can be very
effective even with no
minimum purchase for the
referrer to receive a reward.
Referral programs attract high CLV customers!

SOURCE: Garnefeld, Ina, Andreas Eggert, Sabrina V. Helm, & Stephen S. Tax (2013), “Growing Existing Customers‘ Revenue Streams Through Customer Referral
Programs,” Journal of Marketing, 77 (July), 17-32.
What Research Shows
• An analysis of 1,097 prepaid
cellular customers who made a
successful reward program
referral showed that 93% of
participating customers were
retained 1 year later vs. just
81% of customers in a matched
group who did not make a
referral.
Practical Takeaway
• A referral program is a good
investment despite its costs
and potential risks.
• A referral program can be very
effective even with no
prerequisites (e.g., minimum
amount of assets, minimum
stay) for the referrer to receive
a reward.
Referral programs increases referrer CLV!

What Research Shows
• Referrals to close friends are
slightly more likely if a reward
is split (reward both) rather
than only to self (reward me).
• Referrals are as likely to
acquaintances with both.
• However, a “reward me” option
is more likely to make the
receiver suspicious of motives!
Practical Takeaway
• If only one reward option is
provided, a reward both option
is desirable.
SOURCES: Ryu, Gangseog and Lawrence Feick (2007), “A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood,” Journal of Marketing, 71
(January), 84-94. | Jin, Liyin, and Yunhui Huang (2014), “When Giving Money Does Not Work: The Differential Effects of Monetary Versus In-kind Rewards in Referral
Reward Programs,” International Journal of Research in Marketing, 31, 107-116.
Reward both referrer and friend!

Offer cash for reward both, but in-kind otherwise!
SOURCE: Jin, Liyin, and Yunhui Huang (2014), “When Giving Money Does Not Work: The Differential Effects of Monetary Versus In-kind Rewards in Referral Reward
Programs,” International Journal of Research in Marketing, 31, 107-116.
What Research Shows
• Cash is king when it comes to
generating referrals with a
“reward both” option.
• But an in-kind reward such as a
movie voucher is less likely to
be perceived negatively.
• And an in-kind reward is more
effective at generating referrals
for a low awareness brand.
Practical Takeaway
• A cash reward is likely better if
a “reward both” option is
selected.
• A non-cash reward is preferred
for a “reward me” option, and
may be better for a new brand.
• Examples: T-Mobile offers a
$25 credit and Bank of America
gives $25 for referral success.

Offer a meaningful reward.
What Research Shows
• Research shows that larger
rewards may lead to more
referrals.
• And, a larger reward increases
referrer loyalty to the firm.
• A referral reward is most
effective with acquaintances
(vs. close friends) and with
lesser-known brands.
Practical Takeaway
• A reward should definitely be
offered. It has solid ROI.
• The reward need not be
extravagant to be effective, but
it is wise to test options.
• A ROI recommendation is to
set the reward at an amount
that is approximately 1/3 of the
customer lifetime value.
SOURCES: Garnefeld, Ina, Andreas Eggert, Sabrina V. Helm, & Stephen S. Tax (2013), “Growing Existing Customers‘ Revenue Streams Through Customer Referral
Programs,” Journal of Marketing, 77 (July), 17-32. | Ryu, Gangseog and Lawrence Feick (2007), “A Penny for Your Thoughts: Referral Reward Programs and Referral
Likelihood,” Journal of Marketing, 71 (January), 84-94. | Jin, Liyin, and Yunhui Huang (2014), “When Giving Money Does Not Work: The Differential Effects of
Monetary Versus In-kind Rewards in Referral Reward Programs,” International Journal of Research in Marketing, 31, 107-116.
Make the reward attractive, but not wasteful!

What Research Shows
• Customers are more likely to
refer a high quality brand.
• A larger reward increases
referrals among even high
quality brands.
Practical Takeaway
• Make a request to customers
to refer a service brand
immediately after they report a
high quality interaction.
SOURCES: Ryu, Gangseog and Lawrence Feick (2007), “A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood,” Journal of Marketing, 71
(January), 84-94. | Jin, Liyin, and Yunhui Huang (2014), “When Giving Money Does Not Work: The Differential Effects of Monetary Versus In-kind Rewards in Referral
Reward Programs,” International Journal of Research in Marketing, 31, 107-116.
Request a referral at the point of happy!

What Research Shows
• There is a higher referral ROI in
some customer segments.
• Customers are likely to refer
others like themselves.
• Efforts to encourage referrals
are more effective when
targeting those who have not
referred, but who have
characteristics of referrers.
Practical Takeaway
• Offer a higher referral reward
to high value customers to
encourage more referrals from
them.
• Determine the characteristics
of referrers and target
promotions to those with high
referral potential, but low
actual referrals.
SOURCES: Schmitt, Philipp, Bernd Skiera, & Christophe Van den Bulte (2011), “Referral Programs and Customer Value,” Journal of Marketing, 75 (January), 46-59. |
Kumar, V., J. Andrew Petersen, & Robert P. Leone (2010), “Driving Profitability by Encouraging Customer Referrals: Who, When, and How,” Journal of Marketing, 74
(September), 1-17.
Increase the reward for high value customers!

What Research Shows
• The loyalty of new customers is
most likely to be positively
impacted by making a referral
via a referral program.
Practical Takeaway
• Offer a referral reward
opportunity to customers upon
first use of a service rather
than after signing up.
Offer a reward to new customers!
SOURCE: Garnefeld, Ina, Andreas Eggert, Sabrina V. Helm, & Stephen S. Tax (2013), “Growing Existing Customers‘ Revenue Streams Through Customer Referral
Programs,” Journal of Marketing, 77 (July), 17-32.

What Research Shows
• Customer referrals to
acquaintances are more likely
to be motivated by a reward.
• Customer referrals to
acquaintances are more likely
to raise concerns of ulterior
motives.
Practical Takeaway
• Offer a higher reward as more
referrals are made. This will
ensure continued motivation to
refer beyond close friends.
• Ensure that a “reward both”
option is available.
SOURCES: Ryu, Gangseog and Lawrence Feick (2007), “A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood,” Journal of Marketing, 71
(January), 84-94. | Wirtz, Jochen, Chiara Orsingher, Patricia Chew, and Siok Kuan Tambyah (1012), “The Role of Metaperception on the Effectiveness of Referral
Reward Programs,” Journal of Service Research, 16 (1), 82-98. | Verlegh, Peeter W. J., Gangseog Ryu & Mirjam A. Tuk and Lawrence Feick (2013), “Receiver Responses
to Rewarded Referrals: The Motive Inferences Framework,” Journal of the Academy of Marketing Science, 41, 669-682.
Change the reward to attract acquaintances!

What Research Shows
• The impact of type of reward
and reward structure on
referrals depends on customer
characteristics, brand
characteristics, and whether a
referral is to a friend or
acquaintance.
Practical Takeaway
• Provide options to customers
for type of reward (in-kind,
cash, symbolic [e.g., gift to
charity] and reward structure
[reward both, reward me]
• This may increase overall
referral program participation.
SOURCES: Ryu, Gangseog and Lawrence Feick (2007), “A Penny for Your Thoughts: Referral Reward Programs and Referral Likelihood,” Journal of Marketing, 71
(January), 84-94. | Jin, Liyin, and Yunhui Huang (2014), “When Giving Money Does Not Work: The Differential Effects of Monetary Versus In-kind Rewards in Referral
Reward Programs,” International Journal of Research in Marketing, 31, 107-116.
Give customers referral options!

Build Awareness
• Promote the program to
current customers via email –
especially those of high value.
• Clearly define the rewards.
• Tie referral messages to top
unmet customer needs.
• Make the referral program
visible in root navigation.
Keep It Simple
• Use a single sign-on solution so
a new account isn’t needed.
• Use autofill and social
integrations to make it fast.
• Allow referrals via multiple
sharing mechanisms.
• Enable personalized referrals.
• Offer personalized reward
codes to allow offline referrals.
SOURCE: ?
Provide a clear and easy path to referrals!
SOURCES: http://www.marketingprofs.com/articles/2015/28028/invite-your-friends-three-best-practices-for-a-successful-referral-program#ixzz3sLfDFnbC |
https://www.salesforce.com/blog/2013/08/customer-referral-program.html | http://www.referralsaasquatch.com/6-ways-create-referral-program-that-
works/#ixzz3sLgz8KBZ

Close the feedback loop!
Follow-up with the Referrer
• Build in a feedback loop in
which the referrer learns when
someone they referred signs
up.
• Say “thank you.”
• Allow referrers to track their
referral conversions.
• Provide the reward in a timely
manner.
Test and Monitor Success
• Test program variations
• Establish success metrics to
monitor over time, e.g., active
users who refer; invites per
referrer; conversation rates
• Prepare to track which referral
types (e.g., Facebook, email)
and events perform best
• Monitor the value of referrals
SOURCES: http://www.marketingprofs.com/articles/2015/28028/invite-your-friends-three-best-practices-for-a-successful-referral-program#ixzz3sLfDFnbC |
https://www.salesforce.com/blog/2013/08/customer-referral-program.html | http://www.referralsaasquatch.com/6-ways-create-referral-program-that-
works/#ixzz3sLgz8KBZ