The Credibility Effect of Paid vs. Non-Paid Referrals

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1 Page 1 of 8 ANZMAC 2009 The Credibility Effect of Paid vs. Non-Paid Referrals Sabrina, Helm The University of Arizona, U.S.A., helm@ .arizona.edu Anne Willach, RWTH Aachen, Germany, A.Willach@wzl.rwth-aachen.de Abstract In services marketing, potential customers often rely on referrals to overcome initial purchase uncertainty. Therefore, providers aim at stimulating referrals, e.g. by using customer referral campaigns. However, these induce cost and, moreover, paying for referrals might affect the recipient s perception of the sender s credibility. Consequently, this paper addresses the following research question: Does paying for referrals have a negative effect on sender credibility as perceived by the recipient? By conducting an experiment addressing mobile telecommunication services, we find evidence for this negative effect on sender credibility. The effect does not differ between sender-recipient relationships characterised by strong or weak ties. Our findings caution managers to consider this potential social side effect of using referrals. Keywords credibility; word of mouth; referrals; customer referral programs; tie strength; experiment

2 ANZMAC 2009 Page 2 of 8 The Credibility Effect of Paid vs. Non-Paid Referrals Introduction Positive word of mouth (WOM) has been analysed as a highly effective marketing tool that enables companies to attract new customers (Haywood, 1989; Wangenheim and Bayón, 2007) as well as bond current customers (Helm, 2003), especially in the services sector. As Harrison-Walker (2001, p. 62) points out, services are natural candidates for WOM communication among consumers because services customers strongly rely on the opinions of other customers when forming their expectations about and evaluations of the service (Bansal and Voyer, 2000; Oliver, 1997). The power of word of mouth (Arndt, 1967) is generally attributed to high credibility in the perception of its recipient. Few academic and managerial contributions have highlighted opportunities to actively manage word of mouth. Customer referral campaigns are the main marketing tool so far to have caught notable attention in scientific literature as a tool for strategically using customer word of mouth (e.g., Godes and Mayzlin, 2004; Ryu and Feick, 2007; Wirtz and Chew, 2002). Incentivising referrals as part of a customer referral campaign induces cost regarding managing the campaign as well as the incentives. Such costs are warranted if referral campaigns are as efficient as pointed out in the literature. However, research has neglected to investigate whether paying for referrals has an effect on the recipient s perception of the sender of the referral and, specifically, whether sender credibility is affected by the sender being paid for the referral. Therefore, we address the following research question: Does paying for the referral have a negative effect on sender credibility as perceived by the recipient? Conceptual Background and Hypotheses Source credibility has been researched in numerous studies that attempt to explain how the content of communication and its presentation depend on the degree of credibility and how varying degrees of source credibility have different effects on outcome variables, such as attitude change (Hovland, Janis and Kelley, 1974). According to Hovland et al. (1974), credibility is a two-dimensional concept for evaluating a source of information that consists of the components competence (or expertness) and trustworthiness. Competence of a source addresses the quality of information and translates to validity of the source s communication. It is based on experience and specific knowledge that are attributed to the source. Perceptions of trustworthiness of a source depend on whether the recipient can be sure that the information is transmitted without a bias (Hovland, Janis and Kelley, 1974). The interplay of the two dimensions is pinpointed by McGuire (1985, p. 263): Besides seeming expert enough to know the truth, the source must seem trustworthy enough to want to report it. Referrals are a dynamic and interactive phenomenon (Bristor, 1990), so that researchers tend to focus on the dyad of sender and recipient, and the strength of their relationship. The concept of tie strength (Granovetter, 1973; Gatignon and Robertson, 1986) contributes to explain the different impacts of word-of-mouth referrals depending on the kind of the dyad (Bristor, 1990; Wirtz and Chew, 2002). A number of authors claim that tie-strength has an influence on perceived credibility (e.g., Bansal and Voyer, 2000; Brown and Reingen, 1987) because stronger ties lead to increasing trust in the other, emotional attachment, and intimacy (Gatignon and Robertson, 1986) or the anticipation of more severe negative consequences in

3 Page 3 of 8 ANZMAC 2009 case that trust is betrayed. Therefore, it may be assumed that senders of WOM in strong-tie relationships are perceived as more credible than senders in weak-tie relationships. Researchers have analysed whether targeting strong ties in the context of a referral campaign is more effective than targeting weak ties. While Wirtz and Chew (2002) suggest to use strong ties because of their stronger influence on the recipient, Ryu and Feick (2007) voice the concern that providers should not pay for referrals in strong ties as these occur naturally anyway: helping is its own reward (p. 86). Hence, referral rewards do not increase referral probability in strong-tie dyads because of the higher social cost of referrals in strong-tie relationships (Ryu and Feick, 2007). Senders in strong-tie dyads might also be more concerned about their credibility. Weak ties seem to be more responsive to referral incentives (Godes and Mayzlin, 2004; Ryu and Feick, 2007), but their influence on the recipient is weaker and might be reduced even more if the fact that a reward was paid had a negative influence on sender credibility. This reasoning leads to the following set of hypotheses: H1: Recipients in strong-tie dyads perceive the sender as more credible than recipients in weak-tie dyads independent of the referral being paid for or not. Whether the sender is perceived as knowledgeable about the referred service should not be influenced by the fact that he or she received payment for the referral and should also not vary between different strengths of relationships. In order to be able to test this, we hypothesise H2: The degree of competence ascribed to the sender by the recipient varies between paid and non-paid referrals as well as regarding different tie-strengths. Our focal hypothesis is that H3: In presence of payment for the referral, recipients will perceive the sender as less credible compared to situations with no payment for the referral independent of tiestrength. In combination with a rejection of Hypothesis 2, this would mean that the expected decrease in perceived credibility is caused by the second dimension of credibility, trustworthiness. If it is assumed that the sender s commitment to the recipient is less pronounced in a weak-tie dyad compared to a strong-tie dyad, a payment for a referral undermines trustworthiness of a strong-tie source more severely. Therefore, our last Hypothesis 4 deals with the moderating effect of tie-strength on the relationship between payment of referrals and sender credibility: H4: In case that the referral is paid for, the recipient will perceive the sender as less credible in a weak-tie relationship compared to a strong-tie relationship. The Experimental Study To establish a causal relationship between receiving paid or non-paid referrals and perceived sender credibility, we chose a post-test-only control group between-subjects design (Campbell and Stanley, 1963) using a student sample. In total, 192 students from three German public universities participated in the final study. However, we excluded 8 questionnaires from further analysis due to their incomplete data, leading to a net sample of 184. We manipulated the independent variable payment (P 0 = no payment; P 1 = payment) and the independent variable tie strength (TS 0 = weak tie; TS 1 = strong tie). The independent variables were manipulated using four different scenarios. All groups were completely randomised. All subjects received a similar description of a social encounter they had with

4 ANZMAC 2009 Page 4 of 8 another student during which they coincidently talked about cellular telecommunications providers. We use cellular telecommunication service as the setting for this study, because the sample population is familiar with this service category and it has successfully been used in other studies investigating WOM (Ryu and Feick, 2007; Wirtz and Chew, 2002). The familiarity requirement is fulfilled; 100 percent of subjects owned a cellular phone. The subjects were told that they were customers of a telecommunications provider, that their contract was about to expire, and that they considered switching to a new provider. The fellow student recommended switching to his provider MobileStar and to choose the student tariff Student@Star. The variable payment was manipulated by telling respondents that, at the end of their conversation, the fellow student told the subject about the service provider s customer referral campaign and that he asked the subject to name him as a referrer in case of choosing the provider (P 1 ). In respondent group P 0, this part of the conversation was left out. Giving subjects different amounts of information leads to the risk that differences in the dependent measures between the experimental and control groups are to be attributed to additional proattitudinal information in the experimental group (Aronson et al., 1990). However, we had to keep the scenario realistic and designed it to resemble a naturally occurring word of mouthsituation. Furthermore, adding information to the scenario might not only manipulate perceived credibility, but also other unobserved variables. The variable tie strength was manipulated by describing different relationships that the subjects have with the fellow student they met in class. In scenario TS 0, respondents were asked to think of one of their distant acquaintances whom they had not had contact with for some time. In scenario TS 1, they were to think of the student as one of their closest friends whom they would be happy to see. This differentiation is based on Granovetter (1973) who suggests good friends and distant acquaintances as equivalents to strong ties and weak ties. In order to make sure that respondents could imagine the indicated situation vividly and realistically, they were asked to identify the good friend or distant acquaintance they were thinking of by noting the person s initials in the questionnaire. Measurement of the dependent variable, and the constructs for manipulation checks was based on established scales, which partly had to be adapted for the present study. Perceived sender credibility was measured using items suggested by Ohanian (1990). The different dimensions of the construct were measured using a semantic differential based on five items for each dimension of credibility. Perceived credibility was calculated as the arithmetic mean of the sub-scales for competence and trustworthiness. All items were measured on sevenpoint scales (see Table 1 for the items included in the study).

5 Page 5 of 8 ANZMAC 2009 Table 1: Construct Measures Item 1) Manipulation check payment I think that my acquaintance friend will receive an incentive from his provider if he refers me as a customer. 2) Manipulation check tie strength I am very close to him. I spend some free time socialising with him. I would perform a large favour for him for instance help him move. I would share personal confidences with him. 4a) Perceived credibility of sender: Dimension "trustworthiness" trustworthy not trustworthy honest dishonest reliable unreliable genuine ungenuine dependable undependable 4b) Perceived credibility of sender: Dimension "competence" knowledgeable not knowledgeable experienced not experienced qualified unqualified capable incapable expert no expert Reference self designed Frenzen and Nakamoto, 1993, p Ohanian, 1990, p. 50. Ohanian, 1990, p. 50. Results First, we assess the convergent validity for the construct measures for tie strength, trustworthiness (first dimension of credibility) and competence (second dimension of credibility) using factor loadings (all.81), factor reliability (all.84), and average variance extracted (all.77). Second, we test the proposed hypotheses. We use a 2 (payment) x 2 (tie strength) ANOVA with perceived sender credibility as dependent variable. Means and standard deviations of the dependent variable are listed in Table 2, sorted by step combination of factors. We can show a significant main effect of tie strength on perceived sender credibility (F-test: F(132,1) = 9.3, p =.003; t-test: t(66) = -3.0, p =.004), indicating that, within strong-tie dyads, recipients regard senders as more trustworthy than in weak-tie dyads, independent of the referral being paid for or not. This supports Hypothesis 1. Hypothesis 2 is tested in a separate 2 (payment) x 2 (tie strength) ANOVA with competence as dependent variable. Neither main effects of factors, nor interaction effect are significant [F-tests: tie strength: (F(132,1) = 3.2, p =.08), payment: (F(132,1) =.32, p =.58), interaction: (F(132,1) = 3.65, p =.58); t-tests: tie strength: (t(66) = -1.78, p =.08), payment: (t(66) = -0.55, p =.58)], leading to rejection of Hypothesis 2. Perceived sender competence is not influenced by the presence of payment or tie-strength. However, there is clear support for a main effect of payment on credibility, leading to support of Hypothesis 3 [F-test: (F(132,1) = 7.6, p =.007); t-test payment: (t(66) = 2.7, p =.009)]. If recipients perceive that the sender is being paid for the referral, sender credibility is reduced independent of tie-strength. The interaction effect presumed in Hypothesis 4 is not supported by the data, though (F-test: F(132,1) = 1.5, p =.22). This means that regarding a paid referral, acquaintances are not more prone to lose in credibility than close friends.

6 ANZMAC 2009 Page 6 of 8 Table 2: Means (and Standard Deviations) of Dependent Variable Payment Tie strength present not present strong weak credibility 5.00 (0.74) 4.63 (0.88) 4.61 (0.75) 5.02 (0.86) Payment not present Payment present weak-tie strong-tie weak-tie strong-tie credibility 4.88 (0.70) 5.13 (0.77) 4.33 (0.71) 4.92 (0.94) Note: all items measured on 7-point, bi-polar scales. The higher the value, the higher sender credibility. N = 66 in upper half of table, n= 33 in lower half of table. Discussion and Implications To our knowledge, this study is the first to theoretically analyse and empirically confirm the effect of paid WOM on sender credibility as perceived by the recipient of the referral. Unlike most approaches in services marketing literature, our study focuses on the effects of WOM on the recipient s view of the sender. The most important finding of our study is that paying for WOM may decrease its overall effectiveness because credibility of this form of communication decreases. Given that credibility is deemed one of the main factors explaining the power of WOM, this finding helps in gauging customer referral campaigns. The effect seems to be reduced to the trustworthiness component of credibility, though. The strength of the relationship does not impact the loss in credibility, meaning that all kinds of sender receiver relationships may be negatively affected by the payment for the referral. Managers should be aware of this potential social side effect of using customers communication behaviour for corporate means. Referral campaigns that build on affective loyalty of the provider s satisfied customers as an intrinsic motivation, and not on monetary referral incentives, might circumvent the credibility loss. Limitations and Further Research Opportunities Although we ensure that the student participants are familiar with the service category, some disadvantages result from using a student sample; for example, students might feature attitudes and behaviours that are not representative of customers in general. Moreover, replicating the study in other service or product settings that feature search qualities would be interesting because trustworthiness of a referral might be less important if product or service qualities can be ascertained prior to purchase. Furthermore, other referral incentives besides monetary ones should be investigated. In case that the reward is intangible such as a thank you-note from the provider, decreased or no loss in sender credibility might result. It is also likely that the actual amount paid determines whether sender credibility is affected negatively. Including (perceived) personality variables of sender and recipient in future studies would be interesting and might clarify whether paid referrals have an identical credibility effect on everyone. Finally, additional studies should evaluate whether the decrease in credibility has an impact on actual consumer behaviour and financial consequences for a service provider. These additional insights could further advance the evolution of WOM as a marketing tool.

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