A STUDY ON REFERRAL REWARD PROGRAMS: EFFECTS OF INCENTIVE VIA PERCEIVED ATTRACTIVENESS AND METAPERCEPTION EFFECT ON LIKELIHOOD TO RECOMMEND

Abstract

Many companies are using referral reward programs to harness the powerful effect of Word of Mouth embedded in referrals. There is a paucity of academic research about the effectiveness of such programs. In this paper, psychological (extrinsic motivation, reinforcement and expectancy-value) and sociological (impression management – metaperception) theories were used to develop the research hypotheses. Incentives are widely used in referral reward programs, but do they really work? An incentive could have both positive and negative impact on likelihood of recommendation; the positive impact works through perceived attractiveness and the negative impact through metaperception. Metaperception refers to one’s judgment of others’ perception towards oneself. In the case of referral reward programs, the person may think that his/her recommendation will be judged unfavourably if others know that he/she will receive a large incentive in return for making the recommendation. Four studies have been conducted to test the efficacy of incentives in referral reward programs. The first study consists of the basic research model testing the two central variables: perceived attractiveness and metaperception. The second study is an extension of the first and includes an independent manipulation of perceived attractiveness. The third study introduces tie strength into this model to reduce the negative impact of metaperception and it was found that there was an interaction effect of incentive size and tie strength on metaperception. The last study introduces distribution of incentives to negate unfavourable metaperception and it was found that with distribution, metaperception only needs to be managed in the presence of very large incentives. Perceived attractiveness and metaperception were found to have powerful impacts on likelihood of recommendation. Effects of incentive size, tie strength and distribution of incentives on likelihood to recommend were largely mediated by these two central variables. Thus they are important factors driving likelihood of recommendation and should be managed effectively in a referral reward program.