Should You Offer Referral Fees?
There’s much to be said about building your business through referrals. For one thing, it’s a lot cheaper than advertising and less time-consuming than cold calling. And there’s nothing like having clients who think enough of your services that they’re willing to recommend you to others.
If you’re thinking about starting a referral fee program, this article is for you. Let’s look at the pros and cons.
The Pros
It doesn’t take an in-depth reading of today’s economic news to understand that times are tough. So, the prospect of receiving a monetary reward from a referral to you could mean a lot, providing a great deal of good will. It might make the difference between your referrer’s being able to pay a bill or two, or her needing to contact the creditors to ask for more time. Or it could make for a nice date night for your referrer and his wife – their first in a very long time.
Referral fees can also serve as the seeds you plant for repeat business. And repeat business from satisfied clients is a lot easier to get than new business from people who’ve never dealt with you before.
If the above reasons make sense to you, then your next decisions will be:
- How much of a referral fee should I pay? Should it be a fixed amount or should it be based on a percentage of the closed sale to the client to whom you’ve been referred?
- What about future sales to that client? Should they also be covered by referral fees?
The Cons
Years ago, I patronized a dental practice that gave $25-per-referral discount cards to patients. The goal was to build the practice by offering the $25 discounts to patients who’d referred others. The new patients got the same discount.
This practice was quite assertive about promoting the discount cards. I found that I could hardly get settled in the chair before the “care to share” card pitch started.
I always took the cards, but never gave them to anyone. Why not? Well, to be honest, I didn’t think the dentist ran a very good practice. Instead of pushing “care to share,” he and the staff should have improved the quality of their work and made the practice referable.
Next on the “con” list is this question: How will the people who are sent to you react if they find out you’re paying for referrals?
For example, imagine your new client going to the same restaurant where your referral fee recipient is dining with his wife. They’re really enjoying their date night. The wine they ordered with dinner has loosened their tongues to the point that your new client overhears mention of your very generous referral fee. On Monday morning, you get an angry phone call from the new client, who’s now a former client. And find yourself on the receiving end of harsh words like “bribe” and “kickback.”
Or people might regard your business the way many online affiliate programs came to be viewed. Long story short, Internet users got very savvy to affiliate links. If they thought the product or service was good enough to buy – they’d go ahead and do so. But they’d be sure to remove the affiliate coding from the link before going to the sales site. You may also have clients who are forbidden from accepting any sort of gift. In many countries, government agencies are very adamant about this sort of thing. If you think that keeping your referral fees quiet will avoid trouble, think again. Bribery has been at the root of many a political scandal, including the one that brought down U.S. President Richard Nixon’s Vice President Spiro Agnew.
Before he became Vice President, Agnew had held various offices in the state of Maryland, including the governorship. Agnew developed quite a reputation for taking bribes from construction contractors, and that continued even while he was in the White House. Eventually, the law and the news media caught up with him, and Agnew was forced to resign the vice presidency in 1973.
So, there you have it. The pros and cons of referral fees. Want to learn more? Figure out how to get more referrals and increase referral business.
How are you rewarding your clients? Let’s discuss this in the comments below:
I suggest a thank you gift. Depending on the amount of the new deal, get them a good bottle of wine with a thank you note. It shows you appreciate it and it doesn’t seem like a bribe.
It is really hard to give a fee for referrals like you mentioned, if a client goes out of their way to send me clients, then I go out of my way to help with any web or technical questions or problems they may have. Now a days, it is not what you know, but who!
I do not think referral fees are a good idea.
If your work and service is really outstanding and good, then your client won’t be able to keep his mouth closed when someone needs a similar work/service done.
He will refer to you, because that’s what good friends/colleagues do: they refer to people they personally like.
People are always asking about a service like: ‘do you know of any good person/company that will do x” and “where should I get this done from, can you recommend ?” etc.
Nabeel.
I don’t ever give $$ as a referral fee. I have tried out giving discounts on the next invoice but found that the clients expected to get it all the time after a referral. I’ve found the best method is to send a gift, like a bottle of wine, or tickets to a show you’ve heard them talk about.
The hardest part is keeping the client from feeling it’s a right to get these gifts so I don’t give them every time.
I think you bring up some good points. Offering a referral fee is an effective way to generate business and build relationships. The key is to be selective when building your network. Take the time to cultivate relationships with like minded professionals where there is a cross selling opportunity. You certainly don’t want to come off like a sales person. It’s ok to reward someone for helping you close business. Just be strategic in your approach and who you create alliances with. Great post.
This was actually on my mind the last few days, while thinking hard about generating more leads.
But like Martha states, some may see this as bribery. And Nabeel made it clear, that if your work is awesome, then you should get referrals automatically.
There are some questions this piece suggests that I must consider. I needed this article right NOW…Freelanceswitch you deliver again.
Good post, never really thought about offering referral fees.
I think it is best to offer an incentive, not cash but possibly % off their next order.
This is a very interesting post and something to think about when it comes to rewarding referrals. I agree with some of the others who commented about giving money being seen as a bribery. I think that sending a nice gift would be good. The size of the gift could be determined by the amount of the referral received. If you get to know the client who referred business to you, you can send a gift that is special to that person and not an generic gift.
I would also offer a special offer to the person who referred someone, letting them know that it is a one time offer for that referral, maybe this would help keep down the amount of people expecting the special price all of the time.
Jenn
I offer a referral fee in the form of future discounts, or if they pay me monthly (which most do) I give them one month free for every referral that leads to a contract over 1k (which most are). I do however give my mom a 20% referral fee in cash because she hands out more of my business cards then i do!
great article!
Good points raised.
I don’t see a problem with referral fees at all. If someone is using your product and service and you say to them “hey, how about a discount on your next month’s subscription if you’re happy to tell you friends about us and they sign up?”
Your customers have their own reputations with friends and their professional network to consider and will only refer you in they think it is a good service / product.
If it is and someone signs up then it’s a win – win and everyone benefits including the referred.
A good strategy if done properly.
The bad reputation has come about by people referring services and products they don’t use or know much about just to make money on the referral fees and are referring dodgy medical products and MLM pyramids etc.
Proper business networking is all about real life referrals and often a fee or something else in return.
I design tools to automate recommendations for freelancers and other businesses and I’ve avoided including mechanisms for paying referral fees. However, it seems like most readers here are saying they think fees are ok. The question will be weather freelancers are willing to pay *more* for recommendation tools that include fee mechanisms. Thoughts?
I agree with the posts about a thank you gift. Nothing beats a cheesecake from cheesecake factory being delivered to your door, unexpectedly.
Referral programmes are generally a good thing. I find that “gift codes” where both the referrer and the referred get a bonus are a particularly good idea because they alleviate the “remove referral code from URI” problem. The bonus is twofold: the referrer will be rewarded for each referral, but the referred will have an incentive to actually use the referral code.
I’m not sure how all this can work for you as a freelancer, though. I guess it depends on what you do. Hosting companies could easily do this (apparently some US based companies already hand out promo codes of their own, it’d be easy to implement a programme where codes are uniquely mapped to referrers). For more personal services (e.g. small agencies or individuals) this might seem awkward (if only because the practice isn’t very widespread).
As for “real world” referrals (“networking”), I suppose gifts are better than fees. When a long-standing client refers a major project to you, it’s more appropriate to send them a bottle of wine or such as “thank you” gift instead (obviously this may be limited where it may be regarded as a bribe, but then the referral wasn’t exactly legal in the first place — there’s a thin line between networking and corruption).
Out of interest, do people feel that there is a clear distinction between referral fees and commission payments?
When we bought our house a few years ago, our realtor was absolutely wonderful so we gave her name to anyone we knew who was house-hunting. After a friend of ours closed with her, we found a gorgeous Southern Season gift basket on our front porch as a thank you. Because of this, when I started my business in 2008, I sent gift cards to those clients and friends who had sent referrals my way. I like to do this around Christmas when things are hectic and I think it’s a nice (unexpected) surprise for folks.
I second @Nabeel (and many others) about not using referral fees. If your work is good, people would be more than happy to refer.
Often I’d just meet my referrer and go out together for a meal or coffee. This also helps to strengthen the relationship.
@Kent What tools do you use to track who has referred you?
It is really hard to give a fee for referrals like you mentioned, if a client goes out of their way to send me clients, then I go out of my way to help with any web or technical questions or problems they may have.
I think that the focus of this article has been whether or not to give referral fees to those clients that have referred business to you, but what about businesses that offer services that can be cross sold from either party? I think that in that scenario a referral fee would be appropriate, no?
I work as a freelancer and through a client met another freelancer providing different services from mine. In this instance, would it be ethical to set up a mutually agreed-upon referral program whereby we give one another X if we pass along future business? Would love any and all thoughts on this!