Why Startups Should Think Twice about Referral Priority Waitlists
Before Robinhood was garnering eye-popping valuations, the latest coming in at $5.6 billion, it was a beta app looking to attract a slew of users, and fast. In order to do so, the company employed an idea that’s become common among startups: a “referral priority” waitlist.
It worked brilliantly, with interest in the app spreading fast until more than 700,000 people had signed up for the official product launch. The success of Robinhood’s referral priority program, and the company’s overall success post-launch, might tempt other startups to follow suit. But there’s a problem.
People don’t like waiting in line.
Luyi Yang of the Carey Business School at Johns Hopkins University and I explore the phenomenon in a recent article for Management Science, and we find that the sweet spot for referral priority is difficult to hit and the mechanism can do more harm than good.
Unlike many reward-driven lists, in which customers receive something of monetary value for getting others to join, referral priority moves users toward the front of the queue once they convince other patrons to sign up.
The referral priority approach has gained popularity in recent years — it’s been used by LBRY and x.ai, for example. Waitlisted.co which helps businesses build waiting lists, says more than 99 percent of its clients have used the technique. On the face of it, the method is a win-win. Companies get more customers, and customers get faster access to a limited product. It’s a clever way for businesses to leverage users’ own dislike of delays in order to attract more clients. Those already on the waiting list become, in effect, sales agents for the company, thus saving money for businesses when compared to using monetary incentives.
To see if referral programs are a worthwhile endeavor, we created a mathematical model of customers’ rational decision making in the context of queueing theory, how companies balance customer demand with their own limited abilities to serve that demand.
What we found is that having a successful referral priority list is similar to the tale of Goldilocks: the conditions have to be just right. When the size of a waiting list is very small, people don’t see much point in trying to move up the queue. And if the list is very big, the people being referred may hesitate to sign up because of the congestion.
Alternatively, the referral system could make a waiting customer’s wait even longer because others are jumping ahead of them by referring friends, and breaking the long-standing custom of first-come, first-served can seem unfair. Referral priority lists can also cannibalize the product. If the waitlist grows dauntingly large, users that found the app on their own, and not by being referred, may decide not to join at all.
All these conditions mean that it’s easy for referral priority to backfire and, instead of garnering a host of interested users, draw fewer referrals and far less positive buzz than if a company opted not to use the concept.
So, where’s the sweet spot? When the existing waiting list is “intermediately small,” or large enough to make it worthwhile for people on the list to get others to sign up, but not so large that it discourages would-be registrants. Whether referral priority is right for your business depends on the product you offer and, more importantly, market conditions.
Robinhood may be a $5.6 billion example of referral priority gone well, but that doesn’t mean it’s an example you should follow.