Reward in Cash or Coupon? Joint Optimization of Referral Reward and Pricing

The popularity of social media has provided great convenience for firms to conduct online referral marketing by using referral reward programs. We contribute to the existing works by examining the profitability of the two referral reward programs, namely reward in cash and reward in discount coupons, and measuring the instant product sales and the informative utility output from consumer referrals. We established two-period optimization models and found that referral reward programs are effective only if the unit referral cost of customers is low and if the repurchase rate of consumers is high enough. To redeem the reward instantly or not (in cash or discount coupon) interacts with the pricing strategy: the cash reward is fixed in combination with a high price followed by a low price strategy, and the coupon reward is fixed in combination with a low price followed by a high price strategy. With the increase in the unit referral cost, a firm will be more inclined to use the joint strategy of coupon reward and a low price followed by a high price strategy. Under the conditions that the referral reward program is ineffective, the pricing strategy with a high price followed by a low price is optimal.