Game Theory: Why your Refer-A-Friend program should encourage Quality Referrals

Image by Aimée MacNeill

We make referrals every day without even thinking about it. We recommend a new movie to a friend during a casual conversation, without necessarily considering the assumptions that go along with the referral. Does our friend prefer action to comedy? Do they really like the leading actors in the film? Have they given positive review for similar movies? We just know we liked the movie, and it follows that our friend might, too.

Why do we refer?

Game theory is the study of strategic decision-making, with the ultimate goal of predicting rational behavior. Game theory is commonly used in economics, philosophy, politics and military strategy. In marketing, game theory helps us understanding customer motivations when making referrals.

Without getting into the actual mathematics behind game theory, the gist is we make decisions based on a predicted outcome that will give us maximum benefit, or utility. Often, these calculations happen subconsciously: I tell my friend about a movie I liked, they see it, like it and are satisfied. I am happy because they accepted my recommendation. In a sense, my own choices are validated by the referral. In short, everybody wins.

In referral marketing, our customer acquisition strategy is pretty clear: take those subconscious assumptions and make them more visible. We want our existing customer to first be satisfied enough with their current product or service that they would consider recommending it to someone they are close to. Then, we want them to actively think about why their friends might be interested in becoming new customers — maybe we know our friend is constantly complaining about their current cell phone provider and may be looking to switch. We don’t want to turn our Refer-A-Friend program into a spam-machine; ultimately we want to encourage thoughtful, targeted referrals. Quality referrals grow businesses. Rewarding referrers creates happy customers who are encouraged to refer again and again.

Image by Aimée MacNeill

Your Customer Refer-A-Friend program: Keep It Simple!

As referral marketers, we want to facilitate quality referrals: by properly incentivizing our customers and making it simple for them to do so through our Refer-A-Friend program. Remember, if your customers have to go through multiple steps or processes in order to gain a reward for a referral, they may decide it’s just not worth the trouble.

Simplicity in your referral program is key. If complexity is necessary for the completion of a referral, game theory will tell us we should then consider increasing the reward offer. Customers will then decide for themselves whether the offer is “worth it” — will the decision to refer produce the maximum benefit for them? Through RewardStream’s referral software Spark, rewarding your customers for their referrals is easy.

For customers, making referrals is inherently strategic when there is that promise of a reward at the end. As customers, we might initially think that it would increase our odds of gaining rewards to send referrals to everyone we know, but then ponder the negative consequences of constantly spamming friends with referral requests. Through careful consideration of consequences, our best bet may actually be to send out “quality-referrals” rather than “mass-referrals” (assuming that our end goal is to earn some rewards and to also keep our friends!).

To grow your business strategically, request a Spark demo from RewardStream!

Originally published at on September 26, 2014.

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