with the skill
# Short version
Don't pay $50 for a free signup. It's the textbook **Cobra Effect**: you reward the easiest-to-fake action, so you'll get fake or worthless signups. Pay for a **qualifying action** further down the funnel instead.
## 1. Check the unit economics first
Free signups aren't worth $50, paying customers might be.
- Effective cost per paying customer = reward ÷ free-to-paid conversion rate
- At 5% conversion, $50 per signup is **$1,000 per paying customer**
- At 20% conversion, it's $250
Compare that to your first-year gross margin per customer (or LTV). A rough rule is to keep the total referral cost under ~30-50% of first-year gross profit, or to fit within your current CAC payback window. If your plan is $15/month, $50 is a very different bet than if it's $300/month.
## 2. Recommended structure
**Pay on conversion, not signup.**
- Trigger: the referred user becomes a paying customer, or hits a meaningful activation milestone (e.g., invited teammates, completed X)
- Hold the payout for 30-60 days (past your refund window) so you don't pay for churned or refunded accounts
Show the rest (64 more lines)
**Make it two-sided.**
- Friend gets something (an extended trial, a discount on the first paid month) and referrer gets cash or credit
- A two-sided offer feels fairer (reciprocity), and it makes the referral an easier thing to share
**Consider credit rather than cash.**
- Account credit costs you less than cash (lower effective cost, since it's your margin, not your dollars), raises switching costs, and attracts fewer fraudsters
- Cash appeals to non-users and affiliates. Decide whether you want advocates or marketers.
**Add a smaller signup-level reward if you want momentum.**
- E.g., $5 credit at signup for the friend plus the $50 for the referrer upon conversion. Small immediate rewards help with present bias, and the big one is the real prize.
**Tier it.**
- Escalating rewards (e.g., bonus at 5 paid referrals) leverage goal-gradient and keep your best advocates engaged.
**Make it easy.**
- Personal link, one-click share, pre-written message, dashboard showing pending/earned rewards (progress visibility drives repeat sharing)
## 3. What could go wrong
**Fraud and gaming (the biggest risk)**
- Self-referral with throwaway emails, bots, signup farms, or people posting links on coupon and "get paid" sites
- Mitigations: pay only on paid conversion or verified activation, delay payouts, cap rewards per user per month, flag shared IPs/devices/payment methods/email patterns, block disposable email domains, require email verification, and keep the right to void rewards in the terms
**Low-quality users**
- Even real people referred purely for the bounty churn fast or never activate. Tie rewards to retention (the hold period) and track referred-cohort retention separately from other channels.
**Economics breaking at scale**
- Referral volume that "works" can still be unprofitable. Set a monthly budget cap and a kill-switch, and track CAC, conversion, and retention for referred vs. organic users.
**Cannibalization**
- You may pay $50 for people who would have signed up anyway (e.g., via a coupon site or a public link). Attribute carefully and exclude existing users and prior signups.
**Brand and trust damage**
- Spammy outreach by referrers hurts your reputation and can violate laws (CAN-SPAM, GDPR/PECR, TCPA for texts). Provide pre-written copy that follows the rules, ban unsolicited bulk messaging, and don't let referrers send emails from your system without consent.
**Legal and compliance**
- Referrers may need to disclose the incentive (FTC endorsement rules in the US)
- Paying out cash triggers tax reporting (e.g., 1099s in the US above thresholds), international payout and sanctions issues, and possibly money-transmission questions if you handle it yourself
- Check the terms of any platform you promote on (app stores, social networks restrict incentivized referrals)
- Have clear program terms covering voiding, caps, and changes
**Support and ops burden**
- Disputes about "my friend signed up but I wasn't credited." Use a visible referral dashboard and clear attribution rules (e.g., 30-day cookie, last-click vs. first-click).
**Training users to expect it**
- If you later cut the reward, advocates may feel it's a loss (loss aversion). Frame it from the start as a limited-time or tiered program, and avoid promising permanence.
## 4. How I'd launch it
1. Calculate the max affordable reward from LTV and conversion.
2. Start small, with a cohort of your best existing users (invite-only), not a public launch.
3. Pay on paid conversion with a 30-60 day hold, plus a friend incentive.
4. Set caps and monitoring from day one.
5. Test reward size and type (cash vs. credit, $25 vs. $50) with A/B or cohort comparisons.
6. After 60-90 days, compare referred-user retention and margin to other channels, then scale or adjust.
## Questions that would sharpen this
- What's your paid plan price and free-to-paid conversion rate?
- Is this B2B or B2C (and is there a team/seat dynamic)?
- Do you have a margin or CAC target?
- Do you already have organic word of mouth to build on?
With those numbers I can suggest a specific reward amount and structure.