Customer Referral Incentives and Social Media

36 Pages Posted: 9 Nov 2014 Last revised: 2 Feb 2016

See all articles by Ilan Lobel

Ilan Lobel

New York University (NYU)

Evan Sadler

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Lav Varshney

University of Illinois at Urbana-Champaign - Department of Electrical and Computer Engineering

Date Written: January 30, 2016

Abstract

We study how to optimally attract new customers using a referral program. Whenever a consumer makes a purchase, the firm gives her a link to share with friends, and every purchase coming through that link generates a referral payment. The firm chooses the referral payment function and consumers play an equilibrium in response. The optimal payment function is nonlinear and not necessarily monotonic in the number of successful referrals. If we approximate the optimal policy using a linear payment function, the approximation loss scales with the square root of the average consumer degree. Using a threshold payment, the approximation loss scales proportionally to the average consumer degree. Combining the two, using a linear payment function with a threshold bonus, we can achieve a constant bound on the approximation loss.

Keywords: Customer Referrals, Social Networks, Social Media

Suggested Citation

Lobel, Ilan and Sadler, Evan and Varshney, Lav, Customer Referral Incentives and Social Media (January 30, 2016). Available at SSRN: https://ssrn.com/abstract=2520615 or http://dx.doi.org/10.2139/ssrn.2520615

Ilan Lobel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Evan Sadler (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Lav Varshney

University of Illinois at Urbana-Champaign - Department of Electrical and Computer Engineering ( email )

1406 West Green Street
Urbana, IL 61801
United States

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