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Speaker: This podcast is brought
to you by Knowledge@Wharton.
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Angie Basiouny: Welcome to Knowledge at Wharton.
I'm Angie Basiouny. Back in the
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mid-'80s, there was a shampoo
commercial starring a young
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Heather Locklear who would look
into the camera and say, "I love
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this shampoo so much. I tell two
friends, and they tell two
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friends, and so on and so on." Forty
years later, that commercial is
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pretty dated, but the concept
behind it is not, it's timeless,
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and that's word of mouth
marketing. I'm here today with
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Dr. Zhenling Jiang. She is a
marketing professor here at
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Wharton, and we're going to talk
about her paper on the topic.
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It's called, "Referral Contagion:
Downstream Benefits of Customer
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Referrals." Companies are going
to want to listen up, because
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Dr. Jiang is also going to give us
a free, simple intervention that
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marketers can use to start their
own referral contagion. Zhenling,
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it's so nice to have you
on.
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Zhenling Jiang: Hi Angie, so nice to be on here.
Thanks for having me. - I've
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been looking forward to it. So
there is a lot of literature on
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word of mouth marketing, nothing
new about that, but you wanted
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to look specifically at this
customer to customer referral.
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Why? - So referrals is a long
established phenomenon, as
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example, you're talking about
earlier. For companies, it's a
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very nice way to leverage the
existing customer base, to use
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their social network to grow the
customer base. For individual
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customers, you and me, you also
have this intuitive appeal. We
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trust recommendations coming
from, say, our friends and
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families more so than maybe an
ad I happen to see online. So
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then it's a very nice way for
companies to kind of just grow
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the customer base. And because
it's a behavior that they really
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want to incentivize, companies
very, very often have incentives
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to encourage this type of
referrals. So if I refer a
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customer to this company, and
they indeed make a transaction,
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very often I, as existing
customer, will get some sort of
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bonus or incentive for their
referral behaviors. So we see
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this very, very often in
practice, and we want to just
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look at what's the value coming
of these referrals? How much
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should it really invest in this
encouraging customer referral
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behaviors? Kind of, what are
these values coming from these
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referred customers, as opposed
to other regular customers? - How
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did you go about studying this?
And I'm listening to hear, like,
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what that value is. I know you
quantified it. How did you go
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about this? - Yeah, so if we think
about customer value to a
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company, very often, we start
thinking about the value that
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they bring to the company
themselves. So if it's a
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shopping platform, that means
how many purchases I make,
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what's the margin on those
purchases, and how long do I
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stay as a customer? So the very
kind of typical CLV, or customer
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lifetime value type of concepts.
And what we know from the
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previous work, it's kind of well
established that referred
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customers actually tend to be
more valuable from their
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interaction with the firm. So
they tend to buy more, they tend
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to stay longer. So overall,
makes them a more valuable
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customer. And what we add in
this research is to say that
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they are not only more valuable
because of their own interaction
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with the companies, not only in
kind of more more purchase, stay
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longer, but they also refer more
customers. So is that aspect of
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the social value that has been
previously overlooked by
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previous research? So kind of
combined all together, if we
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think about what is the value of
a customer to a company, part of
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that is coming from my own
interaction with a company. How
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much I purchase, how long do I
stay? And the important part is
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my social value. So do I bring
in more customers by being in
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the companies? So then what we
establish in this research is
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that we also need to consider
this second component, this
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social value, this refer other
customers component as my kind
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of total value as a customer to
the company. - I want to make sure
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we get in that number that was
in your paper. I believe you're
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going to correct me here. It was
something like almost they can --
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that referred customers can bring
in almost 57 percent more other
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referred customers than non-
referred customers. Can you just
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explain that just a little bit?
- Yeah. So the study, the
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empirical study, leveraged a
very, very large customer base
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with over 40 million customers.
And using that large customer
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base, we're able to quantify
exactly how much higher this
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social component is. And exactly
as you mentioned, we find that
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for referred customers, they
will bring in 30 to 50,
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depending on exactly what the
controls are, more customers than
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a similar looking non-referred
customers. So if you just
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look at kind of very similar
customers from other angles,
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then if you're referred, then
you are bringing kind of, you
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know, ballpark, 50 percent more new
customers to the company, so
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which comprise a very large
social value. - That is a really
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significant number. That's
something for companies to pay
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attention to. What is it that
makes referred customers want to
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refer other customers?
What is the mechanism there?
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- Yeah, that's a great question. That's
something that we've been trying
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to decipher ourselves when
looking at studies. So kind
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of the first reaction we have is,
just because maybe they like it
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more, so they use it more. They --
you know, they tend to buy more,
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so they engage with the company
more, which makes them more
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likely to refer. So that's kind
of the first reaction we have,
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and that's something indeed we
see, and we control for that. So
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even beyond that, we still find
that they still tend to refer
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more, given how much interaction
they have with the company. So
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that's why we uncovered a new
mechanism of why they refer
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more, and that is the social
appropriateness. So what I mean
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by that is, for a referred
customer, which means that this
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customer themselves have joined
the company from a referral. You
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know, their friends referred them
in the first place. So they
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would find that it's appropriate
for me to, you know, also refer
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my friends, and I may get some
incentives from the companies.
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So, because they have experienced
the act of referring themselves,
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they would, in turn, feel it's
more appropriate. So of course,
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this is not something we're
going to be able to test out
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using this 40
million customers, like I
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mentioned before. So this is
something that we actually get
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at with the help of lab
experiment. So everything is
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controlled for whether you are
referred or not referred, or
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perfectly randomized, so people
are exactly in the same
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conditions. And then what we
find is that for the people who
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are just randomly assigned to be
in the referred condition, so
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they were told that they joined
a company through a referral,
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compared to a customer that were
told that they joined the
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companies through seeing an ad.
And we compare kind of how
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appropriate and how likely they
are to refer other customers. We
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exactly replicate this
phenomenon that we saw in this
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large dataset for the company --
for the customers who are kind
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of randomly assigned to be
referred. They also say they are
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more likely to refer others. So
that kind of replicates the main
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findings. And then we also see
this mechanism. They
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consistently feel that it's more
appropriate. They experience
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less psychological cost for
referring other friends. And we
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think this is a very important
phenomenon, and the
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psychological barrier is
something that is like an
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important phenomenon that
prevents people from making more
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referrals, in practice. And
having experienced being
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referred, then they feel it's
like an appropriate thing to do, is
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perfectly fine for me to refer
others, and maybe get a benefit
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for myself. - So that social
appropriateness, that feeling
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good about referring other
people, that's that contagion
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part of it, right? That's the
thing that makes it spread like
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wildfire, so the company can get
more customers, correct? - That's
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exactly right. So if you
encourage someone to refer more,
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and these people have
experienced the act of being
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referred, which then, in turn,
are more likely to refer even
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more people. So once you start
encouraging more, then, exactly as
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you said, the contagion starts
from there. - So that gets us to
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the freebie here for the
companies that comes in your
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paper. What is that intervention
that you're recommending that
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companies do? - Yeah, so after we
find out this mechanism, we're
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thinking, how can we leverage
this? So what's the takeaway
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here? So one easy takeaway is to
say, okay, you should just do
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more referrals, you know?
Referral customers are great. So
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that's nice to know, and it's
nice to determine kind of how
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much incentive we should be offering,
and this and that. But
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then we want to look for other
type of actionable interventions
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that company can have when it
comes to referrals. And we, in
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the end, come up with the
intervention. And as Angie said,
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it's a -- it's a freebie, it's
costless. It doesn't need
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companies kind of invest even in
higher incentives. And I'll
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first talk about what
intervention is, and then talk
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about the rationale behind it.
The intervention is, when you
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send referral invitations to
your referred customers, you
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have a very simple reminder,
telling them that they
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themselves has been referred
before. So you have joined from
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referral, now refer others.
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We were able to test this in a
large scale field experiment
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with 10 plus million referred
customers. And what we found is
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that this very simple reminder
intervention leads to 20 percent higher
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referrals compared to the
control conditions who also get
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this invitation to refer, but
without that reminder. So why
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does it work? It works because,
by reminding customers that they
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also join from this referral, it
becomes very salient to them
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that they themselves have
experienced this act of
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referring, which again, make
them feel it's more appropriate
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to refer their friends. So this
freebie is customer -- companies
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very often have this either
emails or push notifications
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inviting customer to refer, but
for the referred customers to
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simply add this reminder. Again,
costless, same amount of
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incentives. What we have shown
is that it really leads to a
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large, 20 percent increase in referred
customers. - That's a big return
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for what's simply a change in
language, right? You're just
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adding that sentence that says,
hey, you were a referred
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customer. Now it's your turn to
refer others. - Yeah. And I think
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what's really powerful about
this is that we think that this
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psychological barrier, this
worry that, you know, I
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shouldn't be doing this to get
an incentive for myself, is an
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important way to stop more
customers to engage in this type
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of behavior. So we think kind of
more broadly, any type of
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interventions that help people
lower the psychological cost
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will be an effective strategy.
And for the referred customers,
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kind of simply reminding
themselves acts as an effective
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strategy. But I actually believe
there are more different type of
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interventions that can be done,
but getting at a core concept of
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feeling it's an appropriate thing to
do for them. - Great insight.
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Thank you so much, Zhenling.
Thanks for being on.
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- Thank you for having me. Great
to be here. - I'm
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going to remind everyone, your
paper, it's called "Referral
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Contagion: Downstream Benefits
of Customer Referrals." It's
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available online. And I want to
mention your co-author, Dr.
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Rachel Gershon, who is a
marketing professor at UC
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Berkeley. If you enjoyed this
conversation, we also invite you
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