The Effect of Referral Network on the Customer Loyalty

Abstract

This research investigated the effect of the referral connections in customer referral program on the loyalty of referred customers. Customer referral program motivates existing customers participation providing rewards when the referral succeeds. A recommender refers an acquaintance to the service after considering the demand for the service, and the referred customer who signed up for the service through this process refers the service usage pattern of the recommender. Referral connection, the relationship between a recommender and a referred customer, in this sense reveals more direct and more mutual relationship than general social connection does. The authors explored how the referral connection is related to the referred customers loyalty with respect to the referrers loyalty and referral pattern. Two qualitatively different problems should be considered to analyze the referred customers loyalty, since they first determine whether to use a service or not, and decide how much amount of service they use. The results showed that a referred customer is more likely to buy the service when the referrer spends less and provides a recommendation less frequently. This study initially suggested the referral connection as a factor to explain the customer loyalty. Also, the authors found when referred customers are more likely to be paying users, showing that referrers order amount and referral pattern affect referred customers likelihood to purchase the service. The results thus imply that marketing managers can enhance marketing efficiency considering not only whether a new customer was acquired from referral program but also which existing customer referred the new customer.