Do you find it unfair when a friend gets a referral bonus after you bought the product they recommended? According to new research, the answer largely depends on social distance—or the closeness of a relationship—between the new and existing customer.
In the last five years, the percentage of U.S. citizens with social media profiles has grown from 56% to 81%. Companies want to take advantage of their customers’ social networks, so many encourage customers to promote their products by offering monetary incentives for referrals.
Researchers Yili Hong of Arizona State, Paul A. Pavlou of Temple University, Nan Shi of Shanghai University, and Kanliang Wang of Renmin University of China investigated the success of these online social referrals, with particular interest in the social distance between customers and their expectations of fairness in the distribution of referral rewards.
The research outlines three types of online referral incentives: rewards that go to only the existing customer, to only the new customer, or divided equally between the two. Groupon, for example, offers a monetary bonus to those who have made successful referrals. However, Dropbox splits their reward equally between both the old and new clients.
The researchers conducted both lab and field experiments with people in two types of personal relationships: a long social distance, such as an acquaintance; and a small social distance, such as a friend or a close relative.
Hong, Pavlou, Shi, and Wang found that acquaintances in long social distance relationships prefer the monetary reward to be split equally. But for close friends with a small social distance, people are less concerned about the fairness of the reward.
Interestingly, online referrals are more successful between friends with smaller social distances, despite the reward not being fairly split between friends.
The study is the first of its kind to consider both fairness and social distance in social commerce. “While fairness has been viewed as a fundamental prerequisite to successful referrals, it is only important for distant acquaintances and not close friends,” says Pavlou, senior associate dean and Milton F. Stauffer Professor in the Fox School of Business at Temple University.
This research provides new insight for companies designing online referral systems. Based on these findings, Pavlou says, “Companies can experiment with less than equal (fair) referrals to maximize the success of the referral while minimizing the cost of the reward.”
Learn more about Fox School Research.