Referral Contagion: Downstream Benefits of Customer Referrals

Abstract

Word-of-mouth (WOM) has proven a valuable marketing tool for acquiring new customers, and
companies frequently invest in referral reward programs to incentivize their current customers to spread word-of-mouth. Previous work has documented that referred customers are often more valuable than those who join through other venues. We propose a new, and rather critical, advantage of encouraging referrals − referrals are contagious. Using field data from 41.2 million customers, three preregistered lab experiments, and a field experiment, we find that referred customers make more referrals than non-referred customers. The difference in referrals persists after controlling for the level of match between the customer and firm, individual-level differences, and social network effects. We find that referral contagion is partially driven by customers’ perception that referring is more socially appropriate if they were originally referred to the same product. In a field experiment, we build on previous work on norm salience and show that reminding referred customers that they joined through a referral further boosts their referral likelihood. These results advance our understanding of the social motives that contribute to referral decisions and illustrate that promoting referrals is substantially more valuable than previously estimated.

Keywords: Referrals, Word-of-Mouth, Customer Value, Social Motives