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

While selfish incentives typically outperform prosocial incentives, in the context of customer referral rewards, prosocial incentives can be more effective. Companies frequently offer “selfish” (i.e., sender-benefiting) referral incentives, offering customers financial incentives for recruiting new customers. However, companies can alternatively offer “prosocial” (i.e., recipient-benefiting) referral incentives. In two field experiments and an incentive-compatible lab experiment, recipient-benefiting referrals recruited more new customers than sender-benefiting referrals. In five additional experiments, we test a process account that invokes two countervailing forces: reputational benefits and action costs. First, at the referral stage, senders anticipate reputational benefits for referring when recipients receive a reward. As a result, recipient-benefiting referrals are just as effective as sender-benefiting referrals at this stage. Second, at the uptake stage, recipient-benefiting referrals are more effective than sender-benefiting referrals: recipient-benefiting referrals directly incentivize uptake (i.e., signing up for a new product or service), which is a high-effort action in referral programs. The preponderance of sender-benefiting (vs. recipient-benefiting) referral offers in the marketplace suggests these effects are unanticipated by marketers who design incentive schemes.