Impact of Customer’s Social Value on Optimizing Referral Reward Programs

ABSTRACT With the popularity of social media, firms are prone to relying on the existing customers’ social contacts to acquire new customers. Referral reward programs (RRPs) have become one of the most effective methods. We highlight social motives for customer referrals and assume that the customer can obtain both firm-offered rewards and psychological intangible rewards named social value from his successful referral. Then we explore the impact of social value on firms’ optimal referral reward structure by comparing the equilibriums of two nested Stackelberg games among a firm, a sender (existing customer), and a receiver (new customer). One of the games ignores the sender’s social value, while the other one considers the impact of the sender’s social value. Firstly, we give the applicable conditions for using RRPs, and show that the sender’s social value helps the firm avoid excessive rewards by sharing the rewards burden. We also find that the firm’s optimal reward structure shifts away from rewarding the sender toward rewarding the receiver or forsaking the reward programs when the firm takes the sender’s social value into account. Considering the conditions under which the firm should use reward programs, the optimal reward structure is closely related to the tie-strength between the two customers. Concretely, when the tie-strength is weak, the firm tends to reward the sender more; conversely, the firm tends to reward the receiver more.