Offering cash incentives for referrals will backfire

In a previous post, I summarized why social relationships are an important part of your business. I mentioned how there’s a fine line between social and market relationships. Referral incentives are one of the ways companies inadvertently introduce market norms in a relationship that hurt their chances for referrals rather than help them. There are better alternatives that cost you less financially and result in stronger social relationships that generate more referrals.

If your neighbor asked you to mow their lawn while they were out on vacation you would probably do it. But how would you feel if they offered you $20 to do it? Your thought process shifts to market norms and you begin to contemplate if it’s worth $20 to mow the lawn rather than thinking about helping your neighbor. Furthermore, if you were to take them up on the offer and mow their lawn for $20, are you likely to do it again for free? Probably not, and if you did you would probably feel as if you’re being taken advantage of.

Just like offering cash to a neighbor to mow your lawn, giving cash for a referral will shift a relationship to market norms. By putting a dollar amount on a referral you’re giving it a value, which is probably much lower than what it’s actually worth. The customer is left thinking, “Does this business really believe my referral is only worth $20?”. In addition, customers that take you up on the referral incentive might not refer again unless there is a similar incentive with greater or equal value.

Conditions on an incentive like, “Get $20 when you refer someone that becomes a customer” are even worse. When it comes to putting conditions on incentives you’re expecting the person to do the work (tell their friends) and only get rewarded if something out of their control (their friend signs-up) actually happens. That would be like your neighbor saying, “Mow my lawn while I’m on vacation and if you do a good job I’ll give you $20.” Again, you do all the work (mow the lawn) and only are rewarded based on something out of your control (your neighbor decides it’s a good job). Are you likely to do the work if you know there is a condition on the reward? If you want more people to tell their friends, don’t put a condition on the reward.

The alternative

Give your customers something they can give to friends without an incentive. For example, if you are a car dealer, send your best customers a certificate they can give to friends for a free carwash at the dealership. Even though you’re not giving your customer something with financial value, you’re giving them something that will improve their social relationships. They’re more likely to give the gift to their friends, and are telling their friends they buy at your dealership without even knowing it.

Finally, when you don’t offer an incentive for a referral it leaves more room for you to do the unexpected. Turn your $20 cash incentive for a referral, into an unexpected gift worth $20 when they do refer. You’ll spend the same money and get more referrals in the future. If you mowed your friend’s lawn and the next day you found a batch of fresh cookies at your door with a thank you, how would you feel? I’m sure the next time they asked you to mow their lawn you’d do it without thinking. The best part about doing the unexpected is that people are more likely to share what happened, increasing your opportunity for positive word-of-mouth.

Sending a thank you card for a referral is probably the least expensive and biggest bang for your buck to build a stronger relationship and ensure that the person will refer again.

The next time you consider offering cash incentives, think again. The real long-term impact of that incentive is probably not as positive as you would hope.

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