On the Ethics of Referral Marketing and Group Marketing

This article was written prior to the merger with Think Shift under its previous name, LogiStyle.

Many companies offer their clients an incentive, in cash or kind, if a client referral results in new business. What obligation does the recipient of that incentive have to disclose their vested interest to their friend whom they referred? What obligation does the company have to ensure such transparency? These questions become more pertinent if the incentive is significant. Referral marketing is fraught with these ethical issues. At LogiStyle, where all of our business comes from word of mouth referrals, we have often thought of offering such incentives but have refrained from doing so for want of good answers to these questions.

Recently, group marketing has become popular, most notably with the success enjoyed by a 3-year old company, Groupon, and the press they enjoyed as a result of Google’s overtures.

The original concept of group marketing was to encourage informed customers to use their social and professional network to amass a large enough interest in an attractive commercial offer to make the offer economically viable for the sponsoring company. Group marketing provides goods and services at a discounted price to all members of a group provided the group is adequately large. The members of the group are thereby encouraged to promote the sponsoring company and the associated offer to their network of friends and secure the required group size. Here the transaction is transparent and all members of the group benefit from it. The ethical questions of referral marketing do not apply to group marketing. Groupon, originally focused on retail customers of B2C companies, grew so popular that they transformed their business model from requiring a minimum group size to limiting the size of the group.

The concept of group marketing is equally applicable to B2B companies, such as our own, LogiStyle.

However, no clear leader appears to have emerged in offering group marketing services to B2B companies. This might be because one might not need an established clearing house for group marketing to B2B clients. We explore here how a B2B company, like LogiStyle, might be able to use group marketing in some provocative ways. The strategy of group marketing is to invite your clients to promote your products and services to their network of contacts, by offering an attractive discount to the entire group, provided a group of a desired size is amassed.

LogiStyle is in the business of offering workshops to corporate executives.

Workshops are scheduled speculatively in a specific city and marketed to clients in the area. Clearly, the business model requires a minimum number of clients to sign up for the workshop for LogiStyle to break even, and the profits stem from the incremental clients that sign up beyond the minimum. There might be some parallels between our business model and that of many of the readers’ businesses. We share our thoughts on group marketing using the LogiStyle example for specificity, but in the hopes that it might apply to your business as well.

We have considered incentivizing our clients to promote our workshops to their colleagues in their network by offering a discount to the first n registrants to a workshop, provided n registrants actually sign up.

The interested client is then incentivized to promote our workshop to their professional colleagues to ensure the required number of registrants and secure their discount. We have already implemented this model in what we call our KickStarter program. Alternatively, how about if we offered a discount to all members of a group, with the amount of discount increasing with the size of the group and asymptotically reaching a tolerable amount? In other words, if you can amass a larger group, you and your friends will all enjoy a larger discount. We are still toying with this idea. Or, even more provocatively, what if we combined the concepts of group marketing, with the older concept of pyramid marketing? Will we be bumping up against the ethical questions of referral marketing, with which we started this Food for Thought?

I hope these thoughts cause you to think about the relevance of this new concept of group marketing to your own business. If you do, I would certainly appreciate hearing your thoughts.

Food for Thought is our way of sharing interesting concepts on corporate leadership and management with others who might find it useful. The thoughts offered are intended to be controversial and thought provoking. They are intended to help our readers intentionally realize their potential, what we call Potentionality.