I was at a networking event and one of my friends (a small business owner) said:
“Someone referred a client to me and they are asking for a 20% referral fee. I don’t charge for referrals. If you’re someone I know and I believe you will do a good job, I’m going to refer business to you because it’s the right thing to do. I can’t believe he is asking for 20% when I’m going to be the one doing the work.”
Referral Fee Questions
I thought this was interesting, so I spoke with other professionals and posed these questions to them:
1 – Do you expect others to give you a referral fee (or “bonus”) and how much do you expect?
2 – Do you pay a referral fee to people who send business your way?
3 – What do you pay?
The answers varied. In fact, from the 10 people I spoke to, there was not one similar answer.
- For one, charging referral fees is part of his business model. He makes money for every referral he sends (he expects 20%) and he considers this practice to be one of his strategic revenue streams. If it is not your practice to pay referral fees, he does not refer business to you – plain and simple.
- Another business owner said that when she started her business (10 years ago), she did not ask for referral fees; she was happy to help others by sending them referrals. But now she does. When I asked her what changed, she said she realized it was “just good business sense.”
- Another business owner happily pays out referral fees (as much as 25%) for business she receives. When I asked her why, she told me that every referral she receives is one less customer she needs to proactively find. She hates marketing herself and considers the referral a savings of her money and time. Interestingly, when I asked her if she expects others to pay her referral fees, she said “No.”
Referral Fee Patterns
There were some patterns that emerged from the people with whom I spoke:
1 – Almost all of the men I spoke with consistently asked for and expected referral bonuses. No apologies. No emotion. It is what it is.
2 – The women I spoke with either did not, or if they did, what they expected ranged anywhere from 5% – 20%. In some cases, they regularly accept free products or services as compensation for a referral. Very few of the women had black and white answers; they took several factors into consideration: friendship (or type of relationship), income range, length in business, size of business and quality of the products/services they could receive in return.
This is by no means a scientific study, but it is fascinating nonetheless.
This post is called “You Be The Coach” because this topic is very important. Many people have these same questions and since there is not standard practice, it’s your opinion and advice that counts.
What advice do you have regarding referral bonuses?
(Feel free to answer anonymously.)
Photo Courtesy of NeoGaboX.
{ 12 comments… read them below or add one }
I’m sure that this is, in large part, driven by the norms of different industries. Within recruiting, it’s a very common practice to split the profit from placements 50/50 – they are referred to as “Split Agreements.”
I guess the biggest question I would pose is “How much is a referral worth to your business?” Would the long-term relationship be worth offering a referral bonus in the beginning to get it started?
Michael
I had an experience about this topic not to long ago. I referred someone to a Realtor and played as liaison for a while also.
What got my goat wasn’t that I didn’t get a referral fee (which I believe is even illegal) but I didn’t even receive a phone call or postcard thank you. To make $1,000’s off a referral and not even say thank you is just bad form. Last time a I ever refer her.
So I guess my stand is don’t ever expect a referral fee. It could place someone in a very awkward social and possibly legal situation. Plus, if you are only referring them because of the kick back then you aren’t doing the referred any favors by trying to line your own pockets. Refer people because you believe they are the best for what they need. However, if you get a referral do you best to say thank you. Hell, just buy me a beer and I’m happy!
You ask an excellent question Michael. Too often we tend to look at things in terms of profitability vs. long-term relationships. Everyone should ask themselves the question you posed.
That stinks. She should have asked herself the question Michael suggested. What’s worse is that she doesn’t realize she’s burned a bridge. You’re right about the legal issue. I don’t know about realtors but I discovered that referral fees are illegal in the financial planning and legal sectors. I think you make a good point about the integrity of someone who only makes referrals to those who pay him. Thanks for joining the conversation!
When I am helping clients, my job is to pick the best man (or woman) for the job. If one person pays me a bounce back and the other does not, how impartial can I be? I think this is much more than a do or don’t, good for business or not issue. I think there are some underlying ethics here.
Thank you for your comment Debi! So another issue around referral payments is the perception they could evoke in the eyes of the client. I’m curious, what if the client doesn’t know about the payment? I appreciate the discussion.
I know that we spoke about this issue of referral fees. In several industries including mental health, coaching and dispute resolution, for example, referral fees are considered unethical and is even part of the Model Standards of Ethical Practice. Each person needs to check their professional industry’s standards regarding referral fees.
Referrals are a huge part of my business. It’s funny, because as much as I am a Search Engine Optimizer, and I do get a lot of hits to my site from Google, I feel like people are hesitant to just call a web guy they haven’t heard something about first. Especially while I am still somewhat new in town and am building my personal brand.
So that said, referrals are my world.
Sometimes I will do some work for someone, and let’s say I would have charged them a thousand dollars. They may pay some small amount up front, if anything, and through future referrals they earn the work I put out there. There is a lot of risk to that, as someone who may think they’re well connected, might never produce a solid lead, but I like to to think you shouldn’t let that discourage you from being generous when and where you can.
What I tell my clients, much more than my friends is that if they refer a client to me, I’ll record a 10% credit in their name, and if they require future services they’ve got that credit saved until they use it. For many business owners, I feel like they come back and update their site or create a new AdWords campaign for example, because they have that credit. They may wind up spending more than their credit, but it’s having that credit that keeps me in their mind, like a Gift Card to Best Buy, you’re not exactly going to waste it!
I have passed on a “referral discount” as well, where instead of paying the referrer I’ll pass savings on to their friend instead, this way they “got their friend a deal”.
Great discussion Alicia, I appreciate reading these comments, especially because referrals are such a big part of my business.
I do not ever expect a referral fee nor have I ever accepted one. In my line of work (event planning), my referrals are strictly based on the client’s: budget, personality, style and whether or not the person can do the job the client wants. It is so much more than just doing the job. I create teams and build on the synergy to create teams who deliver dreams (weddings) or can all come together to complete a large production project (conventions & meetings).
Anytime a vendor has offered a referral fee, I’ve asked they pass it on to the client as a discount. The client appreciates it and so do I. I love that they offer it, I just refuse to accept it. I choose to price my services based on what I want and NEED to make. At no time is a referral fee part of this number. If you choose to charge your worth, there is no need to ask for or accept a referral fee.
I always want the clients I work with to know I’ve recommend vendor A, B and C because they are capable of doing the job and are a good fit; not ever because I can make 10-20% more.
Bottom line – unless you are disclosing these fees to your clients, it isn’t fair to them.
You can them “referral fees” but most people call them “kickbacks.” Where I come from (the wedding industry, in the South) they are considered extreeeeeemely unethical. In fact, every wedding planner association I know of requires that their members sign contracts promising to never ask for or accept kickbacks.
It may be common to some people, but that doesn’t make it okay. When someone asks you for a vendor referral (or worse yet, when they PAY you to help them choose vendors), they’re trusting that you’re referring people based on the quality of their work, their customer service, their dedication to their work, and their general awesomeness at what they do… NOT how big of a kickback they’re going to slip you under the table if the client hires them. To me, that is blatantly slimy and dishonest and unethical.
I’m actually faced with a referral fee situation right now and would appreciate advice. My best friend introduced me to another person with the intention that we would all write a book together. While she will write some of the book, she will not write the lion’s share of it. The other party is finding the publisher, etc. so doing some heavy lifting. Now my friend is asking me for a finder’s fee — even though she will profit from my work. Should I pay it — and if I do, how much? She is also asking for top billing because the book was her idea — although it’s not a unique topic. I value her friendship — but is a finder’s fee appropriate if she is part of the project?
Pattie – I think we are beginning to see a clear delineation in some industries. Thank you for sharing the perspectives from the mental health & dispute resolution areas!
Matt – thank you for your comment. Giving credit or having a referral discount seem less nefarious than giving people cash. I like your creativity.
Jennifer – I love your firm stand and I agree with you. We work in a marketplace full of ulterior motives and hidden agendas. Why allow 10-20% to taint anyone’s opinion of our ethics or not. Thank you for your comment and welcome to the Sanera blogging family!
Sam – I think your parallel between “kickbacks” and “referrals” is interesting. Another word for it could be “bribe.” I’m curious, what would your association say to someone giving you a thank you gift for a referral or a discount/credit as Matthew Egan noted above? Thank you for sharing your insights with us.