Just about every business depends on referrals. They are far and away the most effective marketing program for any business.
More than half of all sales are due to Word of Mouth (WOM) – and they don’t cost you a dime. Better yet, customers gained from WOM provide greater than average revenue and tend to be more loyal customers. So why not incentivize customers to generate referrals?
More companies are actively encouraging the spread of WOM by offering incentives such as free products, discounts on future purchases, gift cards and cash. Some research even concludes that more businesses should offer referral incentives.
However, other researchers are skeptical. WOM is effective largely because the referring person is seen as unbiased and credible. If someone is being paid to refer business wouldn’t that erode their credibility in the mind of the listener?
Those who were told about the incentive referrals were less likely to make a purchase.
William Martin, Ph.D. of Eastern Washington University asked this very question in a study of 269 consumers who were referred by a friend to either a music store or to a lawn care service. Some speakers disclosed the fact that they would get a $50 purchase credit for referring a friend, some were not told about the incentive and some speakers simply referred a friend and received nothing in return.
Listeners who were told about the incentive for referring a friend viewed the WOM speakers as less trustworthy and more motivated by self-interest and as a result, consumers were less likely to purchase the product or service, Martin said in his article, Independent versus incentivized Word of Mouth: Effects on listeners, published in the Academy of Marketing Studies Journal.
Disclosing the incentive did increase trustworthiness among listeners compared to not disclosing it all. What works the best? Independent referrals without any incentives produced the highest levels of trust and resulted in more friends purchasing the product or service.
Referral incentives are unlikely to result in increased purchases and may even lead to a negative backlash. It might even depress positive referrals from your best speakers on social media. A separate study published in Marketing Science showed a 90% decrease in positive reviews from the best and most-connected users on social media when the companies publicly offered monetary-incentives.
Your best bet: Don’t offer incentives at all and promote the fact that the endorsements made were freely offered without any payment or incentives. If you do offer a referral incentive, some research recommends offering the listener and the speaker something of equal value so the listener sees the incentive as more equitable.
Even better, simply send a customer who offers a referral a thank you card or small gift as a token of your appreciation. Just stay away from formal incentive programs because, even with the best of intentions, you could be doing more harm than good.