Referral Priority Program: Leveraging Social Ties via Operational Incentives
Management Science, Forthcoming
60 Pages Posted: 26 Oct 2016 Last revised: 30 Dec 2017
Date Written: September 13, 2017
The referral priority program---an emerging business practice adopted by a growing number of technology companies that manage a waitlist of customers---enables existing customers on the waitlist to gain priority access if they successfully refer new customers to the waitlist. Unlike more commonly used referral reward programs, this novel mechanism does not offer monetary compensation to referring customers, but leverages customers’ own disutility of delays to create referral incentives. Despite this appealing feature, our queueing-game-theoretic analysis finds the effectiveness of such a scheme as a marketing tool for customer acquisition and an operational approach for waitlist management depends crucially on the underlying market conditions, particularly the base market size of spontaneous customers. The referral priority program does not generate referrals when the base market size is either too large or too small. When customers do refer, the program could actually backfire, namely, by reducing the system throughput and customer welfare, if the base market size is intermediately large. This phenomenon occurs because the presence of referred customers severely cannibalizes the demand of spontaneous customers. We also compare the referral priority program with the referral reward program when the service provider optimally sets the admission price. Numerical study suggests the referral priority program is more profitable than the referral reward program when the base market size is intermediately small.
Keywords: referrals; priority queues; system throughput; customer welfare; conversion rate; batch arrivals
JEL Classification: C72, M13, M31
Suggested Citation: Suggested Citation