The Impact of Extrinsic and Intrinsic Rewards on Referral Strength in a Professional Service Context

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1 The Impact of Extrinsic and Intrinsic Rewards on Referral Strength in a Professional Service Context Angela R. Dobele, Christopher White, Minh Phuong Doan, Tim Fry, RMIT University Abstract The purpose of this paper is to investigate the relationship between referring clients of professional services firms and rewards. An analytical model of referral strength is proposed and includes extrinsic and intrinsic rewards, importance of the reward and referral behaviour (talkers). The findings indicate that extrinsic rewards that are not important to a client can have a significantly negative impact on referral strength. Extrinsic rewards that are valued have a positive and significant indirect impact on talkers. Intrinsic rewards are significantly associated with positive word-of-mouth but do not influence the strength of referrals. The paper finishes with a discussion of the theoretical and practical implications of the findings. Introduction Even with a renewed focus on word-of-mouth referrals (Anderson 1998; Gilly, Graham & Wolfinbarger 1998; Money, Gilly & Graham 1998; Dye 2000; Gladwell 2000; Rosen 2000; Godin 2001; Khermouch & Green 2001; Silverman 2001) there is much that researchers still have not uncovered about this incredibly important marketing tool. We know, for example, that word-of-mouth communications play an important role in shaping consumers attitudes and behaviours (Brown & Reingen 1987) and purchase intentions (for example, Bikhchandani, Hirshleifer & Welch 1991; Wilson 1994; Henricks 1998; Gladwell 2000; Laemer 2004). Word-of-mouth is more effective than more traditional forms of marketing such as newspaper, magazine advertising (Katz & Lazarsfeld 1955) and advertising (Day 1971), and has more potential impact than any other communication channel (Mayzlin & Godes, 2002, p. 1). Despite these understandings, practitioners often ignore word-of-mouth believing it to be beyond their control (Wee, Lim & Lwin 1995), preferring to believe that as long as their customers are satisfied they will talk (Chung 2000; Gremler, Gwinner & Brown 2001) and the active management of referrals is relegated to the too-hard basket (Lovelock 2001). Scholars have perhaps exacerbated that situation; with over 30 years of research into word-of-mouth little work has focused on how it could be managed more effectively (Wirtz & Chew 2002, p. 141) and a more proactive stance should be taken to seek ways to manage and influence it (Wirtz & Chew 2002, p. 142). The outcome of such research could be the development of a quantitative model which captures 'a marketing phenomenon that most researchers and managers shrink back from addressing at all' (Helm 2003, p. 130). This study therefore aims to enhance the WoM literature in four fundamental ways, first, by proposing and modelling the relationship between referral behaviour and rewards. Second, the research context is the professional service industry and given the intangibility of a service offering, referrals are of utmost importance (Berry & Parasuraman 1991; Mangold, Miller & Brockway 1999). Third, we focus on reward management programs because implementing a poorly designed referral reward program, or introducing such a program in an inappropriate industry, can be wasteful and in the words of (Biyalogorsky, Gerstner & Libai 2001, p. 83) optimizing the reward program is crucial to its success. Finally, and in contrast to 1

2 existing research (for example, Brown & Beltramini 1989; Asugman 1998; Mangold et al. 1999; Maxham & Netwmeyer 2002) our focus is on positive word-of-mouth referrals, not negative. Literature review The following discussion has been divided into three sections. First, an overview of the types of people who refer, second, managing referrals and third, reward programs. Clients who refer At the crux of referral research should be the people who refer, and increased attention is warranted in attempting to understand more about the type of people who refer (Balter & Butman 2005). Katz and Lazarsfeld (1955) defined opinion leaders as people with expert knowledge of a product or service and who share their opinions with prospects and other clients. A client with a wider variety of knowledge than an opinion leader, for example knowledge that covers a lot of different products, shopping centres, service offerings or an industry or marketplace, could be defined as a market maven(for example Feick & Price 1987). A market maven s knowledge is seen as more generalised than that of an opinion leader; for example, the former could refer not just an accountant but also provide advice on aspects of the industry as a whole. While opinion leader and market maven terms are perhaps the most common labels applied to referral types, they are not the only labels researchers have applied. Additional labels developed to define and categorise referring clients include connectors, mavens and salesmen (Gladwell 2000), influences (for example Haywood 1989) and innovators (Williams & Slama 1995). The suggestion we have adopted for this paper is based on personal experiences and anecdotal evidence, and concludes that everybody talks about the products and services they buy and use, so the label is, quite simply, talkers (Balter & Butman 2005). Thus, for the purposes of this research the clients of three professional services firms were categorised as talkers. Managing referrals There are four suggestions in the literature for implementing effective word-of-mouth campaigns. First, train the current staff of an organisation to fully appreciate and value the benefits of having clients doing business with the company (Barry 2001). The explanation of these benefits would need to be beyond the perhaps obvious (without our clients we would not have a business), and more in terms of the overall business benefits (win-win scenarios between client and company). Thus, staffs present these benefits to clients, thereby encouraging them to relate those benefits to potential clients. In this model, management would encourage employees to develop and run their own form of a referral generation program. Such a program could seek to create and maintain professional but individual relationships between staff and clients through the cultivation of interpersonal bonds (Gremler et al. 2001). Second, referrals could be generated by participating in trade shows, special events, news conferences and self-promotional materials in order to generate talk about a firm (Barry 2001). Third, give the punters something truly exciting to talk about. Luckily for some marketing managers, some products seem to lend themselves to a referral based marketing campaign, which can develop an engaging message or a tag-line that captures the imagination (Dobele, Toleman & Beverland 2005). For example, Scope mouthwash designed a 2

3 customised and animated electronic kiss that was electronically mailed to its current customers and asked readers if they were kissable, De Beers attracted referrals through its interactive and innovative website design allowing potential and current customers to design their own jewellery (Dobele et al. 2005) and who can forget the Energizer Bunny that kept going and going and going (Kotler 1997). Finally, there are the suggestions for pro-activity in referral management through the offering of rewards to clients for referring other clients (Biyalogorsky et al. 2001). The result of rewarding clients for their existing referrals may be reduced cost, both in terms of the savings on traditional marketing messages and by including current clients as part of the sales-force (Biyalogorsky et al. 2001). However, a poorly designed referral reward program, or introducing such a program in an inappropriate industry, can be wasteful, therefore, optimizing the reward program is crucial to its success (Biyalogorsky et al. 2001, p. 83). And the risks of insulting currently referring clients can be high. Clients who believe they are being used or that right to vet marketing information is being subverted may respond, and that response can have a significant negative impact on the product or brand in terms of negative referrals and negative publicity (Dobele et al. 2005). It is on the fourth suggestion, rewarding referrals, which this research focuses upon. Rewarding referrals It is only recently that firms have moved towards understanding formal programs designed to encourage existing customers to make product recommendations yet research on rewarded referrals is limited and there is 'almost no empirical work' (Ryu & Feick 2007, p. 84). Customer Referral Campaigns (CRCs) seek to attract new clients through offering incentives or rewards to existing clients who refer the firm (Helm & Schlei 1998; Ennew, Banerjee & Li 2000; Wirtz & Chew 2002) and are popular because of their ability to specifically target customers and cost effectiveness when compared with traditional marketing approaches (Mummert 2000). A reward offering could be a physical good such as free gifts (for example, free perfume from Perfumeoutlet.net), discounts (for example, Caesar's Pocono Resort) or other gifts (for example, real estate company REMAX or Cochran car dealers) (Ryu & Feick 2007, p. 84); physical goods being main incentive used to reward referring customers (Helm & Schlei 1998). But which combinations of rewards are best? And does the value, in terms of meaningfulness of the reward mediate the relationship between rewards and referral strength? For this study, we consider two main types of rewards, extrinsic and intrinsic and their importance to the client. We take the terms extrinsic and intrinsic from cognitive evaluation theory, whereby extrinsic rewards are those given to people 'as an inducement' from an external source (Deci, Koestner & Ryan 2008, p. 1) and intrinsic rewards are those inherent within an individual, such as a person's perceptions of their own competence and their selfdetermination (Deci et al. 2008). Put simply, the research question devised to guide the empirical component of the study is: In what way do intrinsic and extrinsic rewards influence the strength of client referrals? Research model In order to address the research question, the relationships between five key variables are explored. From the referral management literature we consider extrinsic rewards (for example, gift vouchers, tickets to sporting or cultural events and discounts on future bills) and intrinsic rewards (the desire to help someone else and the internal gratification that comes 3

4 with that). The importance of the reward and talkers, clients who are currently offering referrals (Balter & Butman 2005) are posited to intervene between rewards and the strength of the referral as measured by the variable strength (Katz & Lazarsfeld 1955). Given the paucity of research in this area firm hypotheses regarding the role of the intervening variables cannot be realistically offered and as such all paths to the dependent variable have been specified. While this action breaks conventions associated with the use of Structural Equation Modelling (SEM) as an analytical tool it is deemed appropriate here because of the exploratory nature of this investigation. That said, the data set used in the final analysis had been scrutinised by a variety of multivariate statistical techniques before SEM. These findings will assist in the development of a more focused future research agenda. Methodology The survey responses were drawn from a database comprising of 3,172 clients of three accounting and financial services firms, all based in Australia. Before examining the data assumptions relating to missing values, outliers and normality were tested and a total of 206 correctly completed surveys, from 393 returned surveys, formed the basis of the data set. Given that the model presented here has not undergone any prior empirical scrutiny, exploratory factor analysis with maximum likelihood extraction was first used to determine whether the items of the scales were tapping the same constructs (Anderson & Gerbing 1988; Hair, Anderson, Tatham & Black 1998). Items that did not meet a 0.4 cut-off or cross loaded were removed until a clear factor structure was obtained. This precaution resulted in the removal of one item from the importance scale and two from the intrinsic scale. Before testing the structural relationships between the constructs the measurement models were subjected to confirmatory factor analysis with AMOS 7 and in all instances, fit indices met acceptable levels. As Strength of Referral was a single item the error variance was set at 0.65, the smallest value found for the other estimated error variances (Anderson & Gerbing 1988). The associated lambda was set to.80 as single item reliability has been shown to be high (Anderson & Gerbing 1988); this figure was based on the assumption that 80% of the observed score variance was actual true variance. In order to examine the structural relationships and impact of rewards, importance of reward and talking on referral strength, a full model that included all direct and indirect effects was specified and when estimated produced a chi-square statistic of with 95 degrees of freedom. Figure 1 displays this model with non-significant paths removed and when reestimated it produced a chi-squared of with 99 degrees of freedom with a GFI =.852, CFI =.935 and the RMSEA =.069. All error terms, residuals and indicator variables have been removed from the model for ease of interpretation and be obtained from either author upon request. Extrinsic rewards had a direct negative effect (-.31) on referral strength and a significant positive indirect effect (.22) on talkers via importance. Intrinsic rewards were significantly associated (.18) with talkers and there were no significant intrinsic indirect effects on strength. 4

5 Figure 1: Respecified model with non-significant paths removed Discussion Interestingly, the significant impact of extrinsic rewards on referral strength may surprise some readers. Intuition may suggest that rewards may not help but the notion they can actually decrease the strength of a referral may leave some now questioning their rewards profile. The significant relationship between extrinsic and importance was not unexpected, however the significant positive indirect effect of extrinsic on talkers clearly indicates that extrinsic rewards are only useful if they are important to the client. And perhaps, only for those clients willing to admit that a tangible reward for referral behaviour is desired. One of the first lessons to be gained from this research is that firms need to know what the client values before making an offer. Those who refer for intrinsic reasons will talk and are not motivated by extrinsic rewards; in fact, the extrinsic reward may be seen as offensive. Thus, these clients would be less likely to be motivated by a referral reward program. Further research is needed though, as there are no significant direct or indirect effects from intrinsic rewards to referral strength. Yet, the positive relationship between intrinsic rewards and talkers is, perhaps, indicative of these clients desire to help others and this help is its own reward. We also do not know what drives those who refer for intrinsic reasons. What influences this behaviour? Is it a trait like characteristic? Is it experienced based? That is, do positive past experiences influence these kinds of actions. Is it reputation or image? These questions need to be resolved in order to understand more about the nature of intrinsic rewards because until such time we will not know what will stop an intrinsically motivated client talking, (which is a serious problem if they have been a good, positive referrer for a company) and when they cross the line from silence to spreading negative referrals. In concluding, while exploratory this study provides some understanding of the relationships between rewards and referral behaviour (extrinsic can be good but only if the referrer regards them as important, but can be harmful if the referrer is motivated to help others through internal reasons) and proposes this understanding in the services industry (an industry where referrals play an important role). The focus on reward programs can aid practitioner understanding and hopefully avoid both waste and the harmful repercussions of a poorly managed reward program. And finally, the focus of the research of positive referrals is warranted as this type of referral is perhaps less well researched than negative referrals.. 5

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