Social Referral Vendor Economics: Who Really Benefits?

Imagine you just got off a plane and need a ride to your hotel? What do you do? Well, it is likely you will check a rideshare app like Uber or Lyft. You may browse both apps until you find a ride type, rate, and pickup time that meets your needs, then you pay. Now you get to your hotel and want some food, you repeat this process maybe using GrubHub or DoorDash, selecting the restaurant, entrée, and drop-off time, then you pay.

Why do these models work? Why are they so well known? Well, it is simple really; they are connecting people or businesses to a very narrow set of high demand services that can be replicated in any city. You need a ride somewhere or need food, these solutions can help you.

Ok, but this isn’t an article about food or rideshare services. Let’s talk about social referral (‘closed loop’) systems in the healthcare and social service space. The idea behind a ‘closed loop’ referral is that a community-based organization identifies a need for one of their clients, searches a referral directory, then sends the referral. An example might be a housing navigation agency referring a diabetic person to a medically tailored meal organization.

Furthermore, the ‘closed-loop’ term generally refers to a confirmation by the receiving organization that the client has been engaged and accepted for services. This concept was meant to address the practice of giving a client contact information, or scheduling an appointment for them, and never really knowing if the client actually connected with the services they needed.

But do closed-loop referral systems work for communities?

The Michigan Community Information (CIE) Task Force Report seems to suggest there is little evidence to support widespread success, citing:

Meanwhile, implementations of “closed loop referral systems” – one of the primary points of reference for many in the task force, and a major topic in the processes that preceded its formation – have generally reported disappointing results.

This finding is not derived from Michigan sources alone, but several sources across the nation. Although, they should not be particularly surprising. If anyone has spent time learning about the experiences with community organizations they would understand that new technology alone cannot fix complicated, regionally specific challenges. These solutions must go beyond just finding a service in the community, other variables matter, such as member-specific needs, eligibility, and capacity of the receiving organization.

Another interesting feature about referral vendors is their subjectivity to the ‘network effect.’ Much like social media platforms, the more community members that utilize them, the more others will find value. Conversely, the less that utilize the system, the less others will be inclined to join. However, if the latter was to happen to a company like Uber, they would be forced to innovate and create value for the customers. In an article published by Harvard Business Review titled, "Why Some Platforms Thrive and Others Don’t” the authors identified some key network categories in which I would like to evaluate and compare further.

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Network Category Definitions

• Risk of Disintermediation: Where users can bypass the network hub and connect directly to someone else. (You find a pet sitter on an app and no longer use the app and coordinate directly with the pet sitter.)
• Vulnerability to Multi-Homing: Users have access to multiple networks with similar services when adoption of other networks is low. (Toggling between Uber and Lyft)
• Network Clustering: The more fragmented a network is into local clusters, the more vulnerable it is to competition in that location. (Doordash and GrubHub partnering with local restaurants in which some partnerships overlap and others do not.)

Network Comparisons and Costs:

So, what does this table tell us about how each vendor type approaches value? The rideshare application provides a service that is easier to use than the traditional taxi cabstand. However, even with a referral platform, many users still admit to using more traditional methods such as calling or emailing other organizations. For multi-homing, it is easy to switch between rideshare applications, it is not the same with referral vendors--usually you have access to only one and the resources it maintains. For network clustering, good competition is created when multi-homing is available, but for users of referral vendors, it creates fragmented systems in which either they have no access to certain resources or waste valuable time going into multiple systems. Lastly, in the rideshare model, you agree on the price before a service is conducted, but with a referral vendor, you pay yearly, whether or not your users and organizations receive value from the product.

Now, this isn’t to suggest that there have not been successful use cases of referral vendors—there have been.

However, as it stands, there are no economic forces pushing referral vendors to provide better value to their users, despite any community market slogans they may profess. This means that the referral vendors will likely continue to focus on market share than user needs--until they are met with more competitive forces.

I believe that in many regions we will start to see the 'commercial off the shelf' referral solutions start to wane and be replaced by Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) type solutions (AWS, Azure, Salesforce…etc). Communities will coalesce and begin to build something that meets their needs and not another scalable technology product. This isn’t the end for referral vendors, but one thing is for sure, the value proposition to communities is not where it needs to be—and the communities will adjust accordingly.