Referral marketing is a marketing tactic that compensates user recommendations and word of mouth to accelerate innovation adoption. The return on investment (ROI) of referral marketing tends to be high. According to a study conducted by Wharton Business School, the customer acquisition cost (CAC) of referred customers was $23.12 less compared to non-referred customers. Companies with referral campaigns had 86% more revenue growth.
However, recommendations alone do not allow the customers who are willing to refer your business to transmit their enthusiasm about your products or services. Roger’s innovation diffusion theory viewed new product diffusion as a social phenomenon, where a few innovation-loving early adopters use the new product or service, then diffuse the innovation into the majority market via referrals and word of mouth. One problem is that the later adopters are not likely to be as enthusiastic about new products or services as the early adopters might be. A recent study has found that online review ratings for mobile applications, ironically, tend to fall as they become more popular. Also, the study found a structural pattern that the proportion of negative reviews tend to grow as apps diffuse, limiting the potential for further diffusions. As a new product or service diffuses further in the market, they are likely to attract increasingly more skeptic customers who judge strictly the usefulness of the innovation and not be as forgiving as the early adopters who feel enthusiastic about the ‘newness’ of the innovation. The sentiments in user evaluations that you received from the customers who were waiting to use the new products or services and ones from customers who wanted to simply try out can be vastly different.
We recommend that managers connect their experiences rather than simply awarding referral behaviors. Studies in transformational consumer research found that consumers tend to feel more satisfied with new purchases when they focus on ‘time’ using the product or service compared to focusing on usefulness. Managers might compensate the early adopters for using the product together with the later adopters and transmit their enthusiasm and transmit their positive experiences. Food delivery apps are good examples of a business model that grew heavily via referral marketing. The early adopters might find the service feature innovative, fun, and useful. However, the later adopters are more likely to be skeptical about the usefulness of the app and leave negative reviews about the delivery cost or their experiences with the service. Simply referring the app does not generate the context to shift the late adopters’ skepticism and increase the chances of receiving negative word of mouth. Recently, food delivery apps started to compensate the group orders. This is a great example of connecting the experiences while referring the innovation into the late adopter market. Sharing positive experiences shift the late adopters’ focus on new products or services from judging the usefulness to recalling the great time using new products or services. This way, businesses can let their enthusiastic early adopter not only recommend the innovation but also let them transmit their enthusiasm and positivity into the later adopter market.