The Social Psychology of Referral Programs (Part 1)

This post is the first half of a two-part series on the social psychology of referral programs. Click here to read part 2.

Referrals from friends and family have become critical to consumer decision-making. In fact, a 2010 article by McKinsey stated that word of mouth “is the primary factor behind 20 to 50 percent of all purchasing decisions” -- and that’s without the additional economic incentives of a structured referral program. Even further, a 2011 study estimated that customers obtained through one bank’s referral program were more loyal, and ultimately 16-25% more valuable, than non-referred customers. It’s therefore not a surprise that these programs can be powerful tools for companies who are looking to acquire new and valuable customers as part of their growth strategy. But why might this be, and what does it mean for your referral program?

To start, let’s look at what a standard referral program looks like. The process is quite simple: a brand notifies its customers that they’ll receive monetary rewards when they successfully refer friends. These friends (the “invitees”) are then offered an exclusive discount that can be put toward their first purchase. A referral is considered successful if the invitee becomes a customer (yay!).

Given this setup, it’s easy to assume that referral programs generate value simply because they offer customers financial incentives for taking valuable actions. And certainly, these financial incentives are an important part of why people choose to refer friends (and why these friends ultimately make their first purchase). But wait… there’s more. Powerful social forces are also at play in making referral programs effective. These financial and social incentives work synergistically to help a brand acquire customers with high lifetime values.If you’re not convinced, that’s ok. We’ll spend the rest of this post examining this idea and focusing on the social phenomena that motivate customers to refer their friends. Our post next week will continue examining this question by looking at the second half of the referral process and the social phenomena that motivate customers to act on a referral.

So what are we waiting for? Let’s get into it. 

Sharing and Social Capital

According to a study by the New York Times, sharing information is actually an intrinsic human behavior. This suggests that structured referral programs may be effective largely because they facilitate and further incentivize this natural act of sharing.

But what social mechanism makes sharing information so innate? Perhaps we have evolved to display this behavior in part because letting friends know about valuable resources can boost our social capital. Not sure exactly what we mean by this? No problem -- let’s break it down.

A person’s social capital encompasses all of the value (personal, professional, or otherwise) that he or she derives from their personal relationships and social networks. Sharing information can increase this social capital by:

• Increasing the overall value of the person’s social networks by spreading knowledge and awareness of opportunities.
• Serving as a signal to others of the individual’s personal qualities, and in this way affecting his or her perceived social “value”.
• Strengthening specific relationships that the individual has with others.

In fact, in line with this thinking, the same New York Times study identified five reasons that consumers choose to share information. From among them, three corresponded quite distinctly with the social capital mechanisms just outlined. These were the desires to “improve the lives of those who consumers care about” (1), “define themselves” (2), and “grow and nourish their personal relationships” (3). This lends support to the idea that sharing serves an inherently social purpose.

But how exactly do each of these three mechanisms explain people’s willingness to engage in referral programs? Let’s take a look at each in turn.

How does it accomplish this? Well, while informing those we know about high-quality or good-value brands is generally considered benevolent, it also benefits us more directly by increasing our network’s access to these valuable resources. A more prosperous network means -- you got it -- greater social capital. This actually may be one functional reason for the “warm-glow giving” phenomenon, wherein people experience positive emotions after performing altruistic behaviors. By the same rationale, it may also help explain why people have an innate urge to let friends know about great brands (and hence participate in referral programs).

(Don’t worry: none of this is to say that generous people are all secretly selfish. Instead, it provides a functional explanation for the existence of these generous behaviors.)

2. Sharing/referring serves as a signal to others of the individual’s personal qualities, in this way affecting his or her perceived social “value”.

This particular mechanism operates in a couple ways. Firstly, directing friends towards new or high-quality products establishes a person’s credibility and authority within a certain field -- whether that field is skincare, health and wellness, or gourmet foods. Additionally, if the brand is well-perceived, then introducing it to others will associate the recommender with that brand (and, importantly, with the brand’s positive qualities). Indeed, a 2014 study found that consumers often use brands as a means of signaling personal identities. It makes sense, then, that customers often view referrals as an opportunity to demonstrate their own positive qualities.

3. Sharing/referring strengthens specific relationships that the individual has with others.

Sharing and referring inherently foster a sense of connection between individuals. These actions do so by reinforcing a sense of mutual trust, emphasizing specific shared interests, enabling mutual product experiences, and creating similar consumer identities between two people. This all contributes to a sense of mutual understanding, and it emphasizes the “us” in a relationship. Referring someone can also elicit a certain degree of gratitude from the invitee. After all, this referral enables not only an exclusive first-purchase discount, but also informs the invitee of a worthwhile product. (Of course, it’s important that customers expect they will in fact be appreciated for the referral, rather than viewed as self-serving. We’ll get to this in a bit.) Even if not specifically intended to do so, this gratitude can then trigger the powerful reciprocity instinct, which is central to maintaining human relationships.

So what does it all mean?

At this point, you’re wondering -- how can all of this knowledge help you to improve your own program? Well, it’s not difficult to spot that a common prerequisite to referral is the referrer’s belief that your brand is valuable, and will be perceived as such. For this reason, most of the social forces that motivate a referral will derive naturally from creating and maintaining a strong relationship between your brand and your current customers. Specifically, it’s important to show your shoppers that your products are high quality and worth sharing, and that your brand possesses qualities compatible with your customers’ identities. To this end, it’s helpful to:

• Really understand your customers and what they want. We always recommend collecting customer data and feedback, and engaging in lots of conversation with your shoppers.
• Maintain a cohesive brand identity that aligns strongly with the values of both your company and your customers. Ensure that your products are positioned such that they precisely address customer needs.
• Be authentic, trustworthy, and generous to your customers (whether you do this through a rewards program or via other means, such as small gifts-with-purchase or simply transparent communication). Nurturing healthy relationships with your current customers is what will convince them that you’re worth sharing with their friends, and that it’s safe to do so.

While it’s likely that none of this is new information, it’s certainly good to understand that high-quality products and a principle-driven brand are valuable not only in their own right, but also from a marketing perspective.

At this point, it’s also worth mentioning that social forces can occasionally detract from some of the motivation to refer (although typically by less than they encourage it). This will be the case if a customer is particularly fearful of social judgment -- for example, if they’re afraid of seeming self-serving or inauthentic, given that they will themselves receive monetary benefit from making the referral. Some customers may also be nervous about being perceived as bothersome. However, the approach to addressing this potential social friction is largely the same as our approach to maximizing social motivators: prove to your customers that your products are genuinely valuable and worth spreading, and that their friends will feel the same way.

The Takeaway

At the end of the day, the key is this: thanks to their inherently social design, referral programs are effective above and beyond the financial incentives that they offer customers. This fact helps to explain their impressive effectiveness, and it has implications for where to place emphasis when it comes to your own program.

Check out part 2 of our Social Psychology of Referrals series here!