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Incentive contract design for internet referral services: cost per click vs cost per sale

Chi Zhou (School of Management, Tianjin University of Technology, Tianjin, China)
Geni Xu (School of Statistics, Xi’an University of Finance and Economics, Xi’an, China)
Zhibing Liu (Huanggang Normal University, Huanggang, China)

Kybernetes

ISSN: 0368-492X

Article publication date: 9 July 2019

Issue publication date: 23 January 2020

Abstract

Purpose

Internet referral services are a common form of online marketing operating activities. To incentivize infomediaries and improve referral performance, brand retailers typically apply the cost-per-click (CPC) or the cost-per-sale (CPS) payments. The purpose of this paper is to investigate the effect of referral services on the optimal contract with CPC or CPS payments.

Design/methodology/approach

This paper studies a mechanism design problem for internet referral services. To maximize the expected utility of the brand retailer, an uncertain contract model is established in which the brand retailer's assessment of the infomediary's referral service capability is characterized as an uncertain variable. Then equivalent models under CPC and CPS payments are presented to obtain the optimal solutions.

Findings

The results demonstrate that under CPC payments, as the referral service capability increases, the optimal sales volume is increasing, and the optimal transfer payment first shows a declining and then a rising trend. The brand retailer is less likely to raise the optimal transfer payment for the infomediary given a higher CPC revenue-sharing fee percentage, which is counterintuitive. Under CPS payments, the optimal sales volume and transfer payment are also increasing in the referral service capability. In addition, an increase in the click-through rate leads to the infomediary's incremental marginal utility.

Originality/value

The value of this research is its application of incentive contracts to the internet referral services considering CPC or CPS payments. The results of this research can serve as a guide for retailers and infomediaries in their decision-making around online retailing.

Keywords

Citation

Zhou, C., Xu, G. and Liu, Z. (2020), "Incentive contract design for internet referral services: cost per click vs cost per sale", Kybernetes, Vol. 49 No. 2, pp. 601-626. https://doi.org/10.1108/K-07-2018-0371

Publisher

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Emerald Publishing Limited

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