The Impact of Referral Coupons on Customer Behavior and Firm Revenues: Evidence from Field Experiments
Raghuram Iyengar and Young-Hoon Park, 2016, 16-123
Firms frequently employ coupon promotions to increase the propensity to purchase among their customers. Inspired by the success of referral programs by service companies (e.g., Dropbox, PayPal, Airbnb) to acquire new customers, retailers have begun offering referral coupons. The rationale is that referral coupons will generate higher revenues since they can be redeemed by target customers (primary recipients) and their friends (secondary recipients). However, there is little empirical evidence of such impact.
In this study, Raghuram Iyengar and Young-Hoon Park investigate whether firms indeed benefit from referral coupon campaigns. In three studies, they use large-scale field experimental data from a beauty company to assess whether campaign communication with regular or referral coupon is more effective.
The authors find that, surprisingly, referral coupons are, on average, less effective than regular coupons in generating sales from primary recipients. While 9.05% of customers in a regular coupon condition purchased during the campaign, only 7.22% in a referral coupon group did so. Referral coupons decreased purchases most among customers with low frequency and monetary value. They provide empirical evidence that consumer response to referral coupons is most likely the result of diminished trust and brand persuasion.
Overall, the average net revenue from the primary recipients’ purchases in the referral coupon group ($2.34) was lower than that from the primary recipients in the regular coupon group ($2.73). An important managerial question is whether revenue from secondary recipients makes up the difference in revenue. However, when revenue from secondary recipients was attributed to the primary recipient, the net revenue was $2.72—virtually indistinguishable from the average net revenue from the regular coupon group.
Iyengar and Park demonstrate that firms could target customers on the basis of easily observed characteristics, such as prior purchase behavior, to improve the performance of referral campaigns. Thus, for managers, customer segmentation is key when they assess the profitability of marketing campaigns that on the surface may seem beneficial for all customers.
Raghuram Iyengar is Associate Professor of Marketing ,Wharton School of Business, University of Pennsylvania. Young-Hoon Park is Sung-Whan Suh Professor of Management and Associate Professor of Marketing at the Samuel Curtis Johnson Graduate School of Management, Cornell University.
We thank several managers at the participating company for their efforts in making this research possible. Authors contributed equally and are listed in alphabetical order. The authors benefited from comments by Eva Ascarza, Alixandra Barasch, Yupeng Chen, Jorge González, Garud Iyengar, Pinar Yildirim, and Christophe Van den Bulte.
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