Article: Friday, 4 February 2022
Would you rather pay for a dating app, or get it for free by recommending it to your friends on social media? Chances are you’d rather get it for free. Joining and using an app like this certainly increases the number of users on the platform, but what happens to the revenue? New research by Dr Rodrigo Belo and Prof. Ting Li from Rotterdam School of Management, Erasmus University (RSM) finds that introducing referral programmes in freemium platforms (like dating apps when users get basic services free but have to pay for more advanced features) can significantly contribute to increasing the number of referrals at the expense of revenue.
While social referral programmes generate new referrals from users that won’t pay for premium features, they also attract new referrals from users that would pay but prefer to invite others. The result is more referrals but fewer paying users – so how to get the balance right is critical for many platforms.
The research by Dr Belo and Prof. Li was designed to discover how different designs for thresholds affected referrals, revenue, and engagement with the platform for different types of users (i.e., users that invite others versus users that pay), and the quality of referrals. They wanted to know to what extent should freemium platforms use threshold referral programmes.
After working with a partner company to study its social referral programmes, Dr Belo and Prof. Li developed a stylised model with a variety of users who differed in how much they value the platform, and how much effort it costs them to invite referrals. The researchers used data from a large-scale randomised field experiment in an online dating platform to assess the effects on users' behaviour of adding referrals programmes to freemium platforms, and the effects of changing the referral requirements – in effect, they tested users’ decisions to invite others to, pay for, and engage with the platform.
Dr Belo and Prof. Li found that introducing referral programmes in freemium platforms can significantly contribute to increasing the number of referrals, but doesn’t help to increase revenue. But if platforms reserve some of their premium features exclusively for paying users, they can avoid the loss in revenue.
The researchers also found that increasing the requirements for referrals can work as a double-edged sword. Increasing the threshold results in more referrals and in higher total revenue. Yet, these benefits appear to come at a cost. Users become less engaged, decreasing the value of the platform for all users. The researchers explored two mechanisms that helped to explain the differences in users' social engagement.
Finally – and contrary to prior findings – they found that the quality of referrals is not affected by the referral requirements.
First, the researchers showed that referral programmes can allow users to self-select the role that best suits them, allowing for a good balance between growth and revenue. Platforms using freemium business models could amplify social contagion and accelerate product purchases by explicitly requesting users to invite their friends and acquaintances. This can have important implications for the value of the ‘customer lifetime’ and the platform's bottom line.
Second, the increase in acquisitions and revenue from new users comes at the expense of other metrics. Platforms need to carefully assess the effectiveness of their social referral programmes, closely monitor how they affect user engagement, and pay attention to the potential negative consequences in implementing these programmes. Platforms need to evaluate if the value of the new referrals could compensate for the revenue lost by those users that would have paid.
Third, the researchers’ findings also suggest that people value having their friends on the platform. With this in mind, social referral programmes designed to enhance the shared experience of online dating (e.g., organising offline activities) could be particularly effective in increasing platform engagement.
Last, the findings suggest that some people aren’t bothered by having to meet certain requirements to access premium features – they’re keen to engage with the platform anyway. Practically, this information means platforms could adjust the requirements for referrals for different user groups to increase their acquisition of users and payments without hurting the levels of engagement. This adjustment could be dynamic: the platform would start by assigning a freemium plan to all users, and after assessing users' behaviour during the first few weeks, decide who gets the option of access to premium functions in exchange for making referrals.
Dr Belo and Prof. Li worked with a partner company in this project to study its social referral programmes for a few years to propose ways to implement personalised referral plans.
This paper has been published in Management Science (STAR), under the title Social Referral Programs for Freemium Platforms
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Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top-ranked business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become to become critical, creative, caring and collaborative thinkers and doers.
