The Trick to Boosting Customer Referrals

Speaker: This podcast is brought to you by Knowledge@Wharton. Angie Basiouny: Welcome to Knowledge at Wharton. I'm Angie Basiouny. Back in the mid-'80s, there was a shampoo commercial starring a young Heather Locklear who would look into the camera and say, "I love this shampoo so much. I tell two friends, and they tell two friends, and so on and so on." Forty years later, that commercial is pretty dated, but the concept behind it is not, it's timeless, and that's word of mouth marketing. I'm here today with Dr. Zhenling Jiang. She is a marketing professor here at Wharton, and we're going to talk about her paper on the topic. It's called, "Referral Contagion: Downstream Benefits of Customer Referrals." Companies are going to want to listen up, because Dr. Jiang is also going to give us a free, simple intervention that marketers can use to start their own referral contagion. Zhenling, it's so nice to have you on. Zhenling Jiang: Hi Angie, so nice to be on here. Thanks for having me. - I've been looking forward to it. So there is a lot of literature on word of mouth marketing, nothing new about that, but you wanted to look specifically at this customer to customer referral. Why? - So referrals is a long established phenomenon, as example, you're talking about earlier. For companies, it's a very nice way to leverage the existing customer base, to use their social network to grow the customer base. For individual customers, you and me, you also have this intuitive appeal. We trust recommendations coming from, say, our friends and families more so than maybe an ad I happen to see online. So then it's a very nice way for companies to kind of just grow the customer base. And because it's a behavior that they really want to incentivize, companies very, very often have incentives to encourage this type of referrals. So if I refer a customer to this company, and they indeed make a transaction, very often I, as existing customer, will get some sort of bonus or incentive for their referral behaviors. So we see this very, very often in practice, and we want to just look at what's the value coming of these referrals? How much should it really invest in this encouraging customer referral behaviors? Kind of, what are these values coming from these referred customers, as opposed to other regular customers? - How did you go about studying this? And I'm listening to hear, like, what that value is. I know you quantified it. How did you go about this? - Yeah, so if we think about customer value to a company, very often, we start thinking about the value that they bring to the company themselves. So if it's a shopping platform, that means how many purchases I make, what's the margin on those purchases, and how long do I stay as a customer? So the very kind of typical CLV, or customer lifetime value type of concepts. And what we know from the previous work, it's kind of well established that referred customers actually tend to be more valuable from their interaction with the firm. So they tend to buy more, they tend to stay longer. So overall, makes them a more valuable customer. And what we add in this research is to say that they are not only more valuable because of their own interaction with the companies, not only in kind of more more purchase, stay longer, but they also refer more customers. So is that aspect of the social value that has been previously overlooked by previous research? So kind of combined all together, if we think about what is the value of a customer to a company, part of that is coming from my own interaction with a company. How much I purchase, how long do I stay? And the important part is my social value. So do I bring in more customers by being in the companies? So then what we establish in this research is that we also need to consider this second component, this social value, this refer other customers component as my kind of total value as a customer to the company. - I want to make sure we get in that number that was in your paper. I believe you're going to correct me here. It was something like almost they can -- that referred customers can bring in almost 57 percent more other referred customers than non- referred customers. Can you just explain that just a little bit? - Yeah. So the study, the empirical study, leveraged a very, very large customer base with over 40 million customers. And using that large customer base, we're able to quantify exactly how much higher this social component is. And exactly as you mentioned, we find that for referred customers, they will bring in 30 to 50, depending on exactly what the controls are, more customers than a similar looking non-referred customers. So if you just look at kind of very similar customers from other angles, then if you're referred, then you are bringing kind of, you know, ballpark, 50 percent more new customers to the company, so which comprise a very large social value. - That is a really significant number. That's something for companies to pay attention to. What is it that makes referred customers want to refer other customers? What is the mechanism there? - Yeah, that's a great question. That's something that we've been trying to decipher ourselves when looking at studies. So kind of the first reaction we have is, just because maybe they like it more, so they use it more. They -- you know, they tend to buy more, so they engage with the company more, which makes them more likely to refer. So that's kind of the first reaction we have, and that's something indeed we see, and we control for that. So even beyond that, we still find that they still tend to refer more, given how much interaction they have with the company. So that's why we uncovered a new mechanism of why they refer more, and that is the social appropriateness. So what I mean by that is, for a referred customer, which means that this customer themselves have joined the company from a referral. You know, their friends referred them in the first place. So they would find that it's appropriate for me to, you know, also refer my friends, and I may get some incentives from the companies. So, because they have experienced the act of referring themselves, they would, in turn, feel it's more appropriate. So of course, this is not something we're going to be able to test out using this 40 million customers, like I mentioned before. So this is something that we actually get at with the help of lab experiment. So everything is controlled for whether you are referred or not referred, or perfectly randomized, so people are exactly in the same conditions. And then what we find is that for the people who are just randomly assigned to be in the referred condition, so they were told that they joined a company through a referral, compared to a customer that were told that they joined the companies through seeing an ad. And we compare kind of how appropriate and how likely they are to refer other customers. We exactly replicate this phenomenon that we saw in this large dataset for the company -- for the customers who are kind of randomly assigned to be referred. They also say they are more likely to refer others. So that kind of replicates the main findings. And then we also see this mechanism. They consistently feel that it's more appropriate. They experience less psychological cost for referring other friends. And we think this is a very important phenomenon, and the psychological barrier is something that is like an important phenomenon that prevents people from making more referrals, in practice. And having experienced being referred, then they feel it's like an appropriate thing to do, is perfectly fine for me to refer others, and maybe get a benefit for myself. - So that social appropriateness, that feeling good about referring other people, that's that contagion part of it, right? That's the thing that makes it spread like wildfire, so the company can get more customers, correct? - That's exactly right. So if you encourage someone to refer more, and these people have experienced the act of being referred, which then, in turn, are more likely to refer even more people. So once you start encouraging more, then, exactly as you said, the contagion starts from there. - So that gets us to the freebie here for the companies that comes in your paper. What is that intervention that you're recommending that companies do? - Yeah, so after we find out this mechanism, we're thinking, how can we leverage this? So what's the takeaway here? So one easy takeaway is to say, okay, you should just do more referrals, you know? Referral customers are great. So that's nice to know, and it's nice to determine kind of how much incentive we should be offering, and this and that. But then we want to look for other type of actionable interventions that company can have when it comes to referrals. And we, in the end, come up with the intervention. And as Angie said, it's a -- it's a freebie, it's costless. It doesn't need companies kind of invest even in higher incentives. And I'll first talk about what intervention is, and then talk about the rationale behind it. The intervention is, when you send referral invitations to your referred customers, you have a very simple reminder, telling them that they themselves has been referred before. So you have joined from referral, now refer others. We were able to test this in a large scale field experiment with 10 plus million referred customers. And what we found is that this very simple reminder intervention leads to 20 percent higher referrals compared to the control conditions who also get this invitation to refer, but without that reminder. So why does it work? It works because, by reminding customers that they also join from this referral, it becomes very salient to them that they themselves have experienced this act of referring, which again, make them feel it's more appropriate to refer their friends. So this freebie is customer -- companies very often have this either emails or push notifications inviting customer to refer, but for the referred customers to simply add this reminder. Again, costless, same amount of incentives. What we have shown is that it really leads to a large, 20 percent increase in referred customers. - That's a big return for what's simply a change in language, right? You're just adding that sentence that says, hey, you were a referred customer. Now it's your turn to refer others. - Yeah. And I think what's really powerful about this is that we think that this psychological barrier, this worry that, you know, I shouldn't be doing this to get an incentive for myself, is an important way to stop more customers to engage in this type of behavior. So we think kind of more broadly, any type of interventions that help people lower the psychological cost will be an effective strategy. And for the referred customers, kind of simply reminding themselves acts as an effective strategy. But I actually believe there are more different type of interventions that can be done, but getting at a core concept of feeling it's an appropriate thing to do for them. - Great insight. Thank you so much, Zhenling. Thanks for being on. - Thank you for having me. Great to be here. - I'm going to remind everyone, your paper, it's called "Referral Contagion: Downstream Benefits of Customer Referrals." It's available online. And I want to mention your co-author, Dr. Rachel Gershon, who is a marketing professor at UC Berkeley. If you enjoyed this conversation, we also invite you to check out all our content. Just type Knowledge@Wharton into your search bar. Thanks for joining us. - For more insight from Knowledge@Wharton, please visit Knowledge.Wharton.Upenn.edu.