Why Prosocial Referral Incentives Work: The Interplay of Reputational Benefits and Action Costs

Abstract

Selfish incentives typically outperform prosocial incentives, and customer referral programs frequently use such “selfish” (i.e., sender-benefiting) incentives to incentivize current customers to recruit new customers. However, in two field experiments and a fully incentivized lab experiment, this research finds that “prosocial” (i.e., recipient-benefiting) referral incentives recruit more new customers. Five subsequent experiments test a process account for this effect, identifying two key psychological mechanisms: reputational benefits and action costs. First, at the referral stage, senders (existing customers) anticipate reputational benefits for referring recipients (potential new customers), who receive a reward for signing up. These reputational benefits render recipient-benefiting referrals just as effective as sender-benefiting referrals at the relatively low-cost referral stage. Second, at the uptake stage, recipient-benefiting referrals are more effective than sender-benefiting referrals: recipient-benefiting referrals directly incentivize recipients to sign up, providing a clear reward for an otherwise costly uptake decision. The preponderance of selfish, or sender-benefiting, referral incentives in the marketplace suggests these effects are unanticipated by marketers who design incentive schemes.