How Incentive Structure Affects the Effectiveness of Referral Strategy: Evidence from a Randomized Field Experiment on a Lending Platform

Abstract

Large and high quality user base is an important determinant of firm performance. Firms spend a great amount of resources in building referral programs to grow user base. Yet, substantial variations exist in the effectiveness of these referral programs with various incentive structures. We argue that the extent to which referral programs can grow user base depends on how existing users evaluate the cost and benefit of their referral behavior. Using a large-scale randomized field experiment with around one hundred thousand participants on one of the largest P2P lending platforms in China, we find that referral programs structured as self-benefit (egoistic) appeal or other-benefit (altruistic) appeal significantly reduce the number of new users brought by the existing users but new users from other-benefit appeal made more investment. Our study demonstrates that under certain circumstances, these referral programs structured as egoistic or altruistic incentive structure may backfire.

Keywords: Incentive structure; Referrals; Firm growth; Platform

JEL Classification: M00