Invite Your Friend and You’ll Move Up in Line: Optimal Design of Referral Priority Programs

Problem definition : This paper studies the optimal design of referral priority programs, in which customers on a waiting list can jump line by inviting their friends to also join list. Academic/practical relevance Recent years have witnessed growing presence programs as novel customer-acquisition strategy for firms that maintain Different variations this scheme are seen practice, raising question what should be mechanism. Methodology I build an analytical model integrates queuing theory into mechanism framework objective firm is maximize system throughput, is, accelerate customer acquisition much possible. Results My analysis shows has one following structures: full priority; partial first in, out (FIFO); and strategic delay. A full-priority (partial-priority) enables referring get ahead all (only some) nonreferring ones. FIFO does not provide any priority-based incentive. strategic-delay grants but artificially inflates delay show if either base-market size or cost large. Otherwise, above certain threshold; at threshold size; below threshold. find referrals motivate larger capacity therefore surprisingly shorten average delay, even though more sign up sometimes inserted. Managerial implications provides prescriptive guidance launching program rationalizes common schemes practice.