Should You Incentivize Referrals?

Every now and then I’ll get an unsolicited e-mail from a headhunter about some position or another. Many are for jobs that have nothing to do with writing or marketing, and often they are for positions located several states away from where I live. But they aren’t completely irrelevant.

Most of these e-mails conclude by asking for referrals if I’m not interested. And the majority of them offer a cash incentive to do it. Because I work for a company that specializes in helping professionals generate referrals and repeat business, that tactic caught my attention.

Could this work for our customers?

The case for offering incentives

Offering referrals doesn’t really benefit clients in any tangible way. So it stands to reason that by offering an incentive you give them a reason to look for and provide more referrals.

And many companies have had success with the approach. Dropbox is a great example. They tried a wide variety of tactics to grow their business, including Adwords, display ads, and PR. But none of it worked effectively.

What did work was their two-sided incentive: both the referrer and the referee get an additional 500 megabytes of space. This increased sign-ups by 60 percent.

The case against incentives

In his book Predictably Irrational, behavioral economist Dan Ariely explores the relationship between social and market norms. Social norms are what drive people to help a friend move or treat someone to a home-cooked meal, for instance. Market norms are driven by money. Examples include your typical business transactions.

When you ask for un-incentivized referrals, you’re operating under social norms. People do it because they appreciate the relationship they have with you, and want to help out.

When you offer money for referrals, market norms take over. Passing on referrals becomes a cold, hard business transaction. This is dangerous for two reasons:

1. The shift can affect the relationship on a larger scale. If you pay them for giving you referrals, what’s to stop them from expecting payments for reviews, testimonials, or sharing your social media content?

2. Market norms often have an effect that is opposite of what you intended. Here are a couple of examples from Ariel’s book:

Lawyers rejected a request from AARP to provide their services to needy retirees for the discounted rate of $30. But they overwhelmingly agreed to do it for free.

A day care center in Israel tried imposing a fine on parents who arrived late to pick up their children. Instead of being a deterrent, it removed the guilt that parents felt when they were late. What’s worse, the social norms didn’t return when the fine was lifted. In fact, with both social and market norms removed, tardiness increased.

So which is approach is right?

If your business is transactional, then incentives can work. When your business is built on relationships though, the un-incentivized approach the most sense. But that doesn’t mean that you can’t make giving referrals more rewarding.

Instead of offering cash for referrals, try thanking your clients with an unexpected gift to show your appreciation. Gifts keep things in the social-norm realm. Better yet, show clients that you value their relationships and referrals even before they take action.

That’s one of the things that makes American Lifestyle magazine an effective relationship marketing tool. People who receive it think, “This person is doing something nice for me—I want to return the favor.”

The bottom line: the most effective way to increase referrals is to strengthen relationships.