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Optimizing referral reward programs under impression management considerations

journal contribution
posted on 2011-12-16, 00:00 authored by Ping Xiao, Christopher S Tang, Jochen Wirtz
We examine referral reward programs (RRP) that are intended for a service firm to encourage its current customers (inductors) to entice their friends (inductees) to purchase the firm’s service. By considering the interplay among the firm, the inductor, and the inductee, we solve a “nested” Stackelberg game so as to determine the optimal RRP in equilibrium. We determine the conditions under which it is optimal for the firm to reward the inductor only, reward the inductee only, or reward both. Also, our results suggest that RRP dominates direct marketing when the firm’s current market penetration or the inductor’s referral effectiveness is sufficiently high. We then extend our model to incorporate certain key impression management factors: the inductor’s intrinsic reward of making a positive impression by being seen as helping a friend, the inductor’s concerns about creating a negative impression when making an incentivized referral, and the inductee’s impression of the inductor’s credibility when an incentive is involved. In the presence of these impression management factors, we show that the firm should reward the inductee more and the inductor less. Under certain conditions, it is optimal for the firm to reward neither the inductor nor the inductee so that the optimal RRP relies purely on unincentivized word of mouth.

History

Journal

European journal of operational research

Volume

215

Pagination

730-739

Location

Amsterdam, The Netherlands

ISSN

0377-2217

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2011, Elsevier B.V.

Issue

3

Publisher

Elsevier

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