Referral Commissions: To Pay Or Not To Pay?

Thank You NoteAnyone who has ever thought of implementing a referral system in their business had to ponder these questions:

  • Should I or should I not pay referral commissions?
  • If pay, how much?
  • Should I use a specific formula like a percentage of sales or flat amount?
  • Or should I be giving gifts?
  • And what types of gifts would be the most appropriate and effective?

These are all great questions. And even though I don’t think a simple answer that would work well in every situation is possible, here are some principles that may help you find an answer for you and your business.

1. Be Aware Of Legal Implications

In some occupations (particularly those related to healthcare and finance) paying referral commissions could considered illegal. If your industry is regulated, you may want to check with the governing authority in your field about their position on referral fees. Make sure those legal implications don’t become legal complications.

2. Appreciation Is A More Powerful Motivational Force Than Money

Dan Ariely is his recent book, Predictably Irrational tells a story that illustrates this point. A group of lawyers was asked to donate their time and provide legal help to the people who couldn’t afford to pay their $350/hr fees, for free, as an opportunity to “give back to the community”. A certain (relatively high) percentage of lawyers agreed.

The second group of layers was approached with a similar request, only this time they were offered a small hourly rate of, say, $35/hr. Every single one of them said they weren’t interested.

Now, isn’t $35/hr better than $0/hr? As the song goes, ’tain’t necessarily so.

I distinctly remember being a bit ticked off when a friend of many years went out of his way to pay me for the referral I gave him. All I wanted was a sincere thank you for helping him and his fledgling business. I didn’t want it to look like I did it for the money.

(Now, for the record, I’m not the anti-referral-commission type. Referral commissions represent a significant chunk of my business’ revenue. In some cases there is a formal contract in place that clearly states how much money I earn by helping someone generate more sales.)

3. Thanking Is Good. Recognizing Is Better.

Thanking people for referrals is one-on-one. Recognizing is public, one-to-many.

Some ideas for recognizing those who give you referrals:

  • Put their name, picture, and contact details in your company’s newsletter, printed or electronic. If you don’t have a newsletter, start one today. The easiest and the cheapest way is to use software such as http://www.iContactSoft.com (that’s what I use).
  • Write about them on your website.
  • Announce their names at a client appreciation event and have them come up to the podium so that others get to see them.
  • Send out a greeting card or a letter recommending them to your network (which is bound to result in more referrals for them).
  • Take them out to a lunch and send a stretch limo to pick them up at their place of work. They are guaranteed to be the gossip of the day.
  • Send them a box of brownies to their office. They won’t be able to finish the whole box by themselves and will share it with the co-workers.

When you recognize people for giving your referrals, you reinforce their actions and send a message to the rest of your network that you want and appreciate referrals. By seeing that others give you referrals, some of the “non-givers” will receive the social proof they needed to join the ranks of “givers”, and those who have been giving you a few referrals may become true referral ambassadors for your business.

4. If You Decide To Pay Commissions, Be Generous

Don’t just focus on one transaction. Consider how much a new client is worth to your business over their lifetime and use that number in your calculations.

5. Do Unto Them As They Would Have It Done Unto Them

Remember, it’s not about you. It’s about them. There is no one-size-fits-all solution. Learn about them and about what they like and appreciate the most. Fulfill their dream. Give them something they’d like to get but wouldn’t necessarily spend their own money on.

Instead of giving them cash, pay for their romantic getaway. Buy them a ticket to a seminar, a concert or a game they’d like to go to.

How did you answer these questions in your business? How do you thank people for giving you referrals? Post a comment below.

About Alex Makarski

Alex Makarski is a small business marketing expert who has taught seminars and workshops for small business owners in Canada and United Stated. His unique ability is in implementing simple and effective lead generation systems that use a combination of creative referral techniques and joint ventures with other businesses.

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3 Responses to Referral Commissions: To Pay Or Not To Pay?

  1. Jason Gegere June 4, 2011 at 6:54 PM #

    I wanted to comment on your post. Since you are talking about paying for commissions or not, I thought you might find this interesting.

    We are building a referral service focused at small business to help them receive referrals in a simple manner and then track and are receive reminders. The several is currently several months old.

    Community is very important and we are trying to build a solid one. If you are interested please have a look at http://www.passinggreen.com and create an account.

    Thanks!

  2. Cody Muenster December 7, 2011 at 4:15 PM #

    I use Passing Green as an easy way to reward customers that send me new leads with a cash incentive… It’s awesome and completely automates the process allowing me to thank my customers with a reward and write them a heartfelt thank you for their effort!

    You must try out Passing Green.

  3. Hari December 3, 2012 at 6:46 PM #

    We agree with the fact that paying for referral is not wise. But incentivizing both the referrer and their friends equally is a good gesture. A mere thank you would also work. Experts say getting referrals from existing customers is probably the best. As stated in this article, businesses can make the campaign public. Take a look at Parayoo (https://business.theparayoo.com), a free web tool to publicize the referral campaign in an easy manner. It makes the referral process for customers a fun experience!. Hope this site will be useful to you customers. Thanks!

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