In today’s fast-changing e-commerce landscape, businesses are increasingly relying on two novel strategies for winning customers: referral marketing and product discounting. However, this promising pairing may have a sting in the tail, according to HKUST’s Hong Xu and Kai-Lung Hui and colleagues. Although individually effective, these two marketing tools may damage brands’ reputations and sales when used together.
Empowered by soaring Internet connectivity, retailers can leverage consumers’ online social networks to expand their reach. “Instead of passively waiting for new consumers to visit,” say the researchers, “firms can proactively use incentives and tracking technologies to motivate people to make referrals.” This strategy, known as referral marketing, is used by Amazon, eBay, and many other online retail platforms to expand their consumer base.
Another emerging trend in e-commerce is dynamic product pricing, whereby shoppers are offered significant discounts to tempt them to buy. How might these two strategies interact? Conventional wisdom suggests that “product pricing is an important element in designing a referral program,” say the authors. The logic is that a price promotion alongside a genuine recommendation “might strengthen the referral’s persuasiveness.”
Conversely, however, discounting might arouse quality concerns in the context of referral marketing on the Internet. Although consumers tend to trust the recommendations of friends, social ties forged online can be fragile. “Weak ties and potential doubts regarding senders’ motivations,” warn the researchers, “could undermine the effectiveness of referral marketing.” In this context, slashing prices may further increase consumers’ suspicion. “After all,” say the authors, “why would a seller aggressively use multiple marketing tactics that erode its profit to persuade consumers if the product is good?”
To shed light on the interaction between online referrals and price promotions, the team study thousands of transactions on the world’s largest e-commerce platform, Taobao. Focusing on baby care products, they compare sellers’ outcomes using referral marketing, dynamic pricing, and a combination of the two.
“We find positive effects of referral marketing and price promotions on sales, but their interaction effect is negative,” report the authors. Simply put, when the two strategies are combined, they do not augment sales. This negative impact is greater for expensive items, such as strollers, than for disposable products, such as diapers. After all, note the researchers, “consumers are probably more concerned about a stroller’s quality than about diapers’ quality.” A price promotion on top of a paid referral may aggravate such quality concerns.
“These results point to a converging conclusion,” say the authors. “Price promotions attenuate the effect of referral marketing on sales because they elicit more quality concerns from consumers when used together.” In their words, “one plus one may equal less than two in Internet marketing.”
Fortunately, a good seller reputation can ameliorate the adverse impact of combining referral marketing and discounting. Retailers with a strong brand image and reputation for quality may thus be able to combine the two approaches with higher effectiveness. However, less well-established retailers should remain cautious. “If sellers want to expand their customer base when they lack a quality brand image,” say the authors, “they should engage in referral marketing but not price promotions.”
These timely empirical findings will inform the design of referral programs, a powerful marketing tool, and help firms optimize their marketing mix in e-commerce.