Every business has a concern like ensuring that the business gets a continuous flow of new customers or clients? Create a network of people who recommend or refer others to your business in exchange for money, known as a referral fee.
A referral fee is a kind of commission given to the coordinator in a transaction—a person accountable for bringing a consumer to your business. Sometimes, this fee is compensated in exchange for the business introduction, but it is usually tied directly to a sale.
Why referral fees?
Why depend on referral fees? The answer is simple: more and more people don’t believe conventional ads.
Most print ads appear as dead as the dinosaurs. As for digital ads, people are either restricting them with ad blocker software or tuning them out the old-fashioned way. And let’s face it—advertising charges rack up quickly.
But your possible customers trust their peers’ recommendations more than other forms of advertising, making referrals an exceptionally robust marketing tool. Referral fees pay people for sharing your brand and making new customers, so they encourage you to tap into the potential of these trusted recommendations.
But how can you apply a referral fee to produce more sales? This article has you covered.
Referral fee fundamentals
Referral fees are all about rewarding experienced individuals for consistently drawing in new, quality customers. Usually, these individuals have knowledge and connections that your business otherwise wouldn’t have.
It’s kind of like when you pay a broker to search out apartments that haven’t been placed on the market yet. A dealer has the experience and connections to find these apartments that you would never find about on your own.
As a business, you can extend payment to brand advocates who can bring in new business. The structure is likewise a referral program agreement. Still, these people are exceptionally good salespeople, drumming up a new company that you wouldn’t have otherwise. The reward needs to share with brand advocates at some point. It would be best if you considered paying them a referral fee.
Does referral fee work?
Through referral fees, any business can access client networks that are tough to tap into. Suppose someone has a whole network of people who would be perfect customers. In that case, it makes sense to enlist them as a sales person and pay them a percentage of the revenue generated from customers they bring in as a referral fee.
But first, you have to decide whether a referral fee will work for your business. A referral fee will only work if your brand’s products or services are seen as valuable, your customer service is top-notch, and your brand generates positive buzz.
So, make sure to create enthusiasm about what your brand has to offer first! To ensure that people are spreading the word about your business, you can award incentives to those who share your brand.
Keep in mind that a referral fee won’t work if people aren’t excited about your products and services. A standard referral fee incentivizes someone to share relevant information with their network. But why would they share this information if they didn’t believe in it? Intrinsic motivation is far more important than the cash incentive.
Who pays the referral fee?
The person who initiates the process pays the fee. In most methods, the seller promoting their goods and services starts the process of picking an individual ‘referrer’ to search for a ‘buyer.’
Nevertheless, some industries employ third party lead generation services, where they pay the service a percentage of profits for any new consumers that the service helped them gain.
Paying referral fees to individuals: working out the amount.
When you set out to work out a referral fee, several factors consider and ask yourself before you settle.
When you have to pay referral fees to individuals, there’s never a predetermined amount. Normally, it varies, and what’s paid is subject to negotiation and agreement.
Many referral fees are calculated as a percentage of purchases or purchases that a referred customer makes. But, your referral fee does not have to be a percentage. A flat fee usually works well, particularly if margins are thin and/or if you need to pay a salesperson in addition to the referrer.
While deciding the exact flat fee or referral fee percentage, remember that you need to be fair to all parties concerned. If the total cost of a potential purchase is too high to cover the referral fee, the potential customer will find somebody cheaper. But once you agree to pay a certain referral fee, you must adhere to it. You must, therefore, be considerate of your prices.
Here are the variables to consider when deciding on an ideal referral fee:
First, think about servicing the deal and the cost of goods sold.
It would be best if you asked yourself a few questions.
- Are you already paying your salespeople with commissions? If so, is the referring party a replacement for salespeople? Or does the referrer easily send leads to a salesperson?
- Is there a service or consulting segment of the sale?
- Is this a white label type of settlement, where someone else produces the product or service, and you are the provider?
- What does it take you to perform this service, involving material costs?
- How much do your shopping efforts, including ads, cost?
- Once you get a sale, what is your profit margin?
If there is a substantial price of doing business for the sale, you should set a lower referral fee percentage or pick a reasonable flat fee.
Also, paying commissions to both the referrer and your sales team is a surefire way to lower your profits unnecessarily. Rather, think of offering other types of incentives to referrers through a formalized referral program.
How long will the sales process take? In light of that, to what sales should the referral fee apply?
Some sales methods may take a long time to finish. How long does it count as a sale for the referring party? In other words, which sales can someone make a referral fee on if they’re the one who referred the customer? Sales within one month of referring to someone? Within six months? Any purchase by the customer they referred, even if it’s more than a year out from the referral?
These conditions must be clear, so you haven’t handcuffed your referrer always. Be transparent about when the relationship transforms from the referrer to your business.
When does your business get paid?
To help determine the conditions of your fee, think about the answers to these payment questions:
- When and how do you (the business) get paid?
- How are funds received for sale?
- In several installments?
- Is this a recurring service?
- What about refunds or money-back guarantees— must the refund period expire before the referral fee gets paid out?
When cash is received, it helps you plan out your payment schedule. No matter what you decide, ensure you are making money in all cases.
How should you decide referral fee schedules and arrangements?
Depending on how you want to drive your referrals, you could use many different referral fee schedules. It all comes down to what will best motivate your referrers. Consider these incentive structures:
- Greater amounts for the first successful referral (to drive new referrers to get started)
- Increasing amounts based on the number of referrals made (or number of referrals made in a fixed period, such as a month)
- Contests where you reward the high performers within a certain period