Why the worst users come from referral programs, free trials, coupons, and gamification - Deepstash

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The Hidden Costs of Incentive-Based Growth

The Hidden Costs of Incentive-Based Growth

Incentive programs like referrals, free trials, and coupons may seem appealing, but they often attract users with lower lifetime value (LTV), poor conversion rates, and less engagement. These "incentivized users" typically contribute less to the business compared to organically acquired users, highlighting the need for a strategic approach to user acquisition.

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Quality vs. Quantity in User Growth

A common misconception in growth marketing is that more users always equal better outcomes. However, attracting users through incentives can lead to negative selection—where the additional users are less qualified and more discount-oriented, ultimately diluting the quality of the user base and impacting the long-term health of the product.

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Referral Programs: A Double-Edged Sword

Referral Programs: A Double-Edged Sword

While referral programs can boost user numbers, they often attract users looking for quick gains rather than long-term engagement. This leads to lower engagement rates and higher instances of fraud, challenging the initial financial models that justified these programs and underscoring the importance of targeting the right kind of user growth.

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The Cannibalization Effect of Incentives

Incentive programs can prematurely "pull forward" users who might have discovered the product organically, incurring unnecessary costs. This phenomenon highlights the delicate balance between incentivizing new users and allowing organic growth through word-of-mouth, which often brings in higher-intent users at no additional cost.

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Lessons from Uber's Referral Experiences

Lessons from Uber's Referral Experiences

Uber's extensive experience with referral programs reveals a nuanced picture: while driver-side referrals attracted motivated users, rider-side referrals often brought in discount-seekers, leading to a misallocation of millions in marketing spend. This underscores the importance of understanding the different impacts of referral incentives on various segments of your user base.

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CURATED BY

kerem

ぬ-shaped person: Passionate learner having diverse interests. Tech entrepreneur. Obsessive optimizer. Uncomfortably skeptic and curious. Suffering from tsundoku.

CURATOR'S NOTE

Great article that provides a critical perspective on the effectiveness of referral programs, free trials, coupons, and gamification in attracting quality users.

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