Why a referral scheme attracts the wrong customers
Paying for introductions selects the people most responsive to being paid. Volume rises and average customer quality moves in the other direction.
Filed by The Archivist 2 min read
Intuition test — answer before you read on
A paid referral scheme triples sign-ups while 90-day retention halves. What happened?
Correct answer: B
Referred customers can be more valuable when the referrer is matching on fit — Schmitt, Skiera and Van den Bulte found this. A per-head fee dilutes exactly that judgement, an instance of the motivational crowding-out Frey and Jegen documented.
A company offers twenty pounds for each new sign-up introduced. Sign-ups triple. Retention at ninety days falls by half, and the accounts that stayed longest came from referrals made before the incentive existed. Nothing about the product changed during the period.
What everyone sees
Referral volume is treated as a demand signal, and the scheme is judged on cost per acquisition. Both numbers improve, so the programme reports success. The measure captures who arrived and not who was selected, and selection is where the change occurred.
What is actually happening
An incentive does not act uniformly on a population; it recruits differentially from those most responsive to it. Adding a payment shifts the mix of motives from social recommendation, which carries information about fit, towards payment collection, which does not. Schmitt, Skiera and Van den Bulte found that referred customers can be more valuable, but the mechanism depends on genuine matching by the referrer — exactly the component a per-head fee dilutes, an instance of the crowding-out effect Frey and Jegen documented.
Why it stays hidden
The selection hides in the timing of the two measurements. Acquisition is counted immediately and quality appears months later in a different report, usually owned by a different team. The scheme is also evaluated against its own target, which is sign-ups, so it succeeds on the terms it was set and the cost lands outside them.
An incentive selects who responds to it. A per-head fee replaces the referrer’s judgement with their willingness to be paid.
An incentive selects who responds to it. A per-head fee replaces the referrer’s judgement with their willingness to be paid.
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An incentive selects who responds to it. A per-head fee replaces the referrer’s judgement with their willingness to be paid.
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Sources & further reading 3
- Schmitt, Skiera & Van den Bulte, "Referral Programs and Customer Value", Journal of Marketing, 2011
- Frey & Jegen, "Motivation Crowding Theory", Journal of Economic Surveys, 2001
- Akerlof, "The Market for Lemons: Quality Uncertainty and the Market Mechanism", Quarterly Journal of Economics, 1970
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