Referral Programs for Platform Growth: Evidence from a Randomized Field Experiment
Some platforms provide value to their users by facilitating interactions among close connections (e.g. Facebook); others provide value by facilitating interactions among participants that are not directly connected to each other (e.g. online dating sites). For the latter, organic growth is harder to achieve because, even though users benefit from having access to a larger market, they have no incentives in inviting their close connections to the platform, which can lead to an under-supply of new users. In some cases, platforms correct this distortion by using referral programs and providing incentives for users to invite their friends and acquaintances in exchange for getting a free or discounted access to premium features of the platform. In this paper, we use data from a randomized field experiment in an exclusive online dating site to study the effect of member-get-member referral programs on platform growth. Our findings suggest that referral programs can work as a double-edged sword. We find that stricter policies, i.e., policies that require users to invite more friends in order to use the service for free, are more effective not only at contributing for platform growth in terms of the total number of users, but also at fostering paid memberships. However, these benefits appear to come at the cost of reduced level of user engagement on the platform, potentially decreasing its value for all users. We consider two mechanisms that may be at play: delayed access to premium features and social enrichment. We discuss the contributions for literature and implications for business.