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 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, two preregistered lab experiments, and one 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. To explain how referral contagion arises, we find that it 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 show that reminding customers that they joined through a referral boosts referral behavior by 20−27%. These results advance our understanding of the social and psychological motives that contribute to referral decisions and illustrate that promoting referrals is substantially more valuable than previously estimated.