Referral Priority Programs

Abstract

AbstractThis chapter presents a model of the referral priority program, an emerging business practice adopted by a growing number of technology companies that manage a wait list of customers. It enables existing customers on the wait list to gain priority access if they successfully refer new customers to the wait list. Unlike more commonly used referral reward programs, this novel mechanism does not offer monetary compensation to referring customers but leverages customers’ own disutility of delays to create referral incentives. Despite this appealing feature, our queueing-game-theoretic analysis finds the effectiveness of such a scheme as a marketing tool for customer acquisition, and an operational approach for wait-list management depends crucially on the underlying market conditions, particularly the base market size of organic customers. The referral priority program does not generate referrals when the base market size is either too large or too small. When customers do refer, the program could actually backfire, namely, by reducing the system throughput and customer welfare, if the base market size is intermediately large. This phenomenon occurs because the presence of referred customers severely cannibalizes the demand of organic customers. We also compare the referral priority program with the referral reward program and find that the referral priority program is more profitable when the base market size is intermediately small. We further solve for the optimal scheduling rule of the referral priority program and find that in addition to full priority and FIFO, partial priority and strategic delay can also emerge in the optimal mechanism. This chapter is primarily based on Yang and Debo (Manag Sci 65(5):2231–2248, 2019) and Yang (Manuf Serv Oper Manag 23(5):1139–1156, 2021) where interested readers can find proofs of the results shown in this chapter.