Generosity’s Bottom Line

By Jeff Kreisler
Editor PeopleScience.com and Co-Author “Dollars and Sense”

August 13, 2018

Editor's Note:  We'll be discussing this paper at Ideas42's Behavioral Summit in NYC on October 24. Come over! It's one of our patented* PeopleScience Table Talks.

* They're not really patented, but they are really cool.

 

New research reveals the human tendency to engage more fully in referral programs when they give us the ability to reward others. The study – "The Reputational Benefits and Material Burdens of Prosocial Referral Incentives" – has significant implications for influencers, social networking and referral-based marketing strategies.   

We all know it feels good to give to others. But the “gift of giving” can also be surprisingly motivational. 

The paper’s abstract sums up its findings best (which is what an abstract is supposed to do): 

Companies frequently offer “selfish” incentives to customers who refer, incentivizing those customers directly for recruiting friends. However, companies can alternatively offer “prosocial” incentives that reward the referred friend instead. In multiple field and incentive-compatible experiments, this research finds that prosocial referrals, relative to selfish referrals, result in more new customers.  

What does that mean?  Giving a referral bonus to the recipient of the referral is more motivating, and generates more new signups, than offering that bonus to the giver of the referral.  

Giving a referral bonus to the recipient of the referral is more motivating, and generates more new signups, than offering that bonus to the giver of the referral.

Let’s pretend you have an app called a Widget-ee-doo.  You want more customers, so you ask your existing customers to refer you to their friends.  As an incentive, you offer your existing customer $10 for every friend they get to download the app.  This is a “selfish” incentive program: All the financial incentive goes to the referrer – your existing customer – and none to the referred friend – the potential customer. 

In the “prosocial program,” the $10 instead goes to the referred friend – the potential customer – and none to the referrer – the existing one. 

This study shows that this second, prosocial program results in more downloads than the selfish one.   

How did they figure this out?

Working with the Maritz Field Research Collaborative,1 Professors Cynthia Cryder (Olin School of Business) and Leslie John (Harvard Business School) and PhD Candidate Rachel Gershon (Olin) teamed up with the food sharing app GiftAMeal.com and the online video subscription company Game Access.

Francois Fortier, CEO of Game Access (nee, KLF Group), explained his interest in the research by saying, “As a huge fan of behavioral science, I wanted to partake in an experiment where we could share our data with some of the most spectacular minds in the industry and learn from the results to help us better understand the human behaviors around referral on a scientific level.”

The companies and scientists then ran a series of email referral campaigns, doing all the right scientific experiment things – like control groups, replications and variable adjustment – to make sure it was all legit.

Editor's Note: I find the details of  such experiments fascinating – from how it came about (as a result of Gershon’s work with a health care clinic!), to all the variables that were considered, to the thought and care that went into the design and execution (the math!). But even I can’t make things like “binary logistical regression” too exciting, so please review the study for a deeper dive into how field experiments work.

Again, using the scientific method, the researchers found that there were more signups from prosocial referral campaigns than purely selfish ones. 

Considering that most marketers who design incentive schemes use the selfish referral model, the question is what are they missing? What’s going on here? What forces are playing out in such unexpected ways?   

To the abstract-mobile! 

This pattern occurs for two reasons. First, at the referral stage, customers expect to receive reputational benefits when making prosocial referrals within their social network, thereby boosting the performance of prosocial referrals. Second, at the uptake stage, the burden of signing up is high, and therefore referral recipients prefer to receive an incentive themselves. Due to the combination of reputational benefits at the referral stage and material burdens at the uptake stage, prosocial referrals yield more new customers overall.

These incentive schemes have two parts: the referral and the uptake.  Most marketers don’t appreciate the value of reputation at the referral stage and don’t anticipate the burden of sign-up at the uptake stage.

What’s going on here? What forces are playing out in such unexpected ways?

Reputation has a value

Remember the Andre Agassi commercials with the slogan, “Image is everything?” No? Fine, you’re not as old as I am. 

Point is: Reputation matters.  This study shows that prosocial and selfish programs can have similar impact at the referral stage because, when consumers believe the prosocial sharing will provide a reputational boost, the perceived value of that  can compete with the value of a financial benefit.

The fact that consumers value reputation in this way also shows that prosocial referrals are not entirely altruistic.  The reputational benefits only significantly come into play when the referral is made within a social network so that the referrer gets “credit.”  The results were not the same when a reward was made anonymously.  “These referrals aren’t based upon pure generosity, there are still selfish reasons,” says Professor Cryder.

This result may have matched Professor Cryder’s expectations, but not for the reasons she and her colleagues thought.  “We thought (the selfish referrals might not be as powerful) because people feel uncomfortable profiting from the action of the friends.”  While that may still be true, this research showed that “people want to be viewed positively by their friends.”  The positive reputation benefit offsets the motivating loss of monetary incentives at the referral stage. 

The positive reputation benefit offsets the motivating loss of monetary incentives at the referral stage.

The Thankless Uptake Burden

What’s perhaps most clearly overlooked by incentive designers is the uptake stage.  When we get referred to something by a friend, that’s nice. But then we have to jump through various hoops – going to a website, downloading an app, worrying about privacy, creating an account, logging in, uploading info – which all require effort without any incentive beyond the referral. That referral doesn’t fill out forms and share data for us! But when we do have an incentive we are – surprise! – incentivized.

“There’s an assumption that marketers can just get influencers to tell people about something, and they’ll buy it,” says Professor Cryder.  “But such word of mouth is not the wildfire it was meant to be, friends aren’t buying something unless they have their own incentives.” 

By providing a new incentive at the uptake stage and maintaining a substitute incentive at the referral stage, prosocial referrals – simply changing who gets the monetary reward – increase the total motivating power of the entire reward program, without increasing the overall financial outlay for the marketing organization.  

Such word of mouth is not the wildfire it was meant to be, friends aren’t buying something unless they have their own incentives.

Gershon also believes it’s worth remembering that “referred customers are more valuable customers.” So this unexpected finding could be seen as both a problem – whoops, we missed something – and an opportunity for anyone designing incentive programs.

Editor's Note: A friend, Dan Gabriel, has a joke that the word for “problem” is the same as the word for “opportunity” in Chinese, “which is good, because I get to tell my family, ‘I have a drinking opportunity.”  

Ultimately, back on planet behavioral science, these findings should be cause for excitement because there’s a potential tweak to create more referred customers without significantly increasing costs. 

These findings should cause excitement because there’s a potential tweak to create more referred customers without increasing costs.

“My pre-conceived notion was that some academic research might not provide actionable business recommendations due to variables becoming complex,” said GiftAMeal CEO Andrew Glantz. “The results of this study were definitely actionable for us though.”

It’s not cruel to be kind

Maybe there’s even a bigger picture that this study begins to reveal.  Much of Professor Cryder’s work looks at when people are generous and why. What circumstances drive generosity, especially given the “divergence between what we actually do and what we want to do or think we should do?”

For any behavior architect who wants to encourage generosity, maybe we need to look beyond an idealized dream of selfless altruism and consider the selfish motivating power of reputation.  If we want people to do good, we have to let them look  good.   

“Maybe we shouldn't care why people are kind. It would be cool if this was altruistic, but people care about what their friends think about them, so they’re doing something kind,” notes Gershon.  “Whatever it takes to make people act kindly towards others, so long as kindness is valued.”   

Editor's Note: Of course, there’s a balance to strike so that people don’t come across as disingenuously generous, and a broad definition of generosity wasn’t the focus on the research, etc. etc. etc. but a fella can dream, right?

On a less change-the-world note, this important study should make us change our perspective when designing referral incentive programs – or, at least, expand it to include reputation and the uptake stage – for whatever product, service or cause we support. 

1 There’s another related, but entirely different article to be written about the process and benefits of doing collaborative field research like this – from the perspective of industry and academia and the role of an intermediary like the Field Research Collaborative – but that’s another couple thousand words to come.

By Jeff Kreisler
Editor PeopleScience.com and Co-Author “Dollars and Sense”

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