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