Unintended reward costs: the effectiveness of customer referral reward programs for innovative products and services

Abstract

To encourage customers’ referral behavior and expand their customer base, providers of innovative products and services often use customer referral reward programs (CRPs), though not all CRPs deliver on their initial promise. With one field experiment and four online experiments, this research investigates the effectiveness of rewarded referrals for recruiting new customers for more innovative (versus less innovative) offerings and outlines the conditions in which public referral rewards have unintended ramifications and decrease customers’ referral likelihood. In addition to establishing these effects for more innovative offerings, this research identifies some moderating consequences, such that the detrimental effect of referral rewards on referral behavior can be attenuated by not disclosing referral rewards (for recommenders) to referral recipients, increasing the referral reward size, and rewarding both recommenders and referral recipients. These findings have theoretical and managerial implications.