Offering higher rewards for customer referrals can actually make the people being referred worse off.
April 1, 2026
Original Paper
Referral Program Design: Thresholds and Cold Starts
SSRN · 6402583
The Takeaway
High referral bonuses trigger a 'cold-start' problem where potential referrers worry that recommending a product for money will look like a bad-faith suggestion. To overcome this, companies hike the rewards even higher, which paradoxically signals to the new friend that the product might be a poor fit, eventually hurting the very people the program was meant to attract.
From the abstract
We study the optimal design of referral programs when customers strategically communicate with multiple friends, trading off referral rewards, concerns about their friends' welfare, and the social cost of making suboptimal recommendations. Threshold-based referral programs are cost-effective in improving referral conversions. However, when customers are highly concerned about making suboptimal recommendations, such programs suffer from a cold-start problem, where the conversion rate stagnates at