How to Set Referral Fees for Customer + Affiliate Programs

What can you do to make sure your business has a constant flow of new customers, and increase your company’s bottom line? Start a referral or affiliate program, and create advocates who reliably share your business with their networks.

Of course, for the best results, you’ll need to offer advocates something in return for their referrals. Often, this incentive is a monetary payout known as a referral fee.

Today, we’ll cover everything you need to know about paying referral fees to individuals, including:

• What’s considered a referral fee
• How to set referral fees for your referral or affiliate program
• Whether referral fees will work for your business

What is a referral fee?

A referral fee is a commission paid to an individual who brings new customers to your business through word of mouth.

Referral fees are sometimes called finder’s fees, referral commissions, or affiliate commissions. They are used throughout a wide range of industries, including real estate, insurance, and SaaS. Sometimes, businesses pay referral fees in exchange for a qualified lead. But more often, a referral fee is tied directly to a sale.

Referral fee fundamentals

The idea behind paying referral fees to individuals  is similar to paying a real estate agent for finding apartments that haven’t been placed on the market yet. A real estate professional has the experience and contacts to find these apartments, which you might never have known about on your own.

As a business, you can offer similar payments – referral fees or finder’s fees – to customers, creators, partners, and fans who bring you quality leads and sales.

These individuals create connections that your business otherwise wouldn’t have. Every time they bring you new business, you pay a referral fee in exchange for their assistance in the sale.

Referral fees in referral and affiliate programs

Within the context of a referral program or affiliate program, the referral fee is the reward you give advocates (existing customers, affiliate, brand ambassadors, or partners) when they bring in a qualified lead or new customer.

These fees are usually paid in cash, although it’s also common for a fee to be paid out as store credits or as a gift card.

Referral fees encourage advocates to keep reliably sending new customers your way. And since these fees are only paid out when you see real results (qualified leads and sales), the referral program covers the cost of the referral fee.

Note: We also recommend giving a reward to referred friends, to encourage them to make a purchase. While this is an important part of a referral program incentive, this isn’t considered a “referral fee.” This reward is still paid for by the referral program, though, as it’s only paid out when the referred friend becomes a lead or makes a purchase.

How do referral fees work in Referral Rock?

Referral Rock referral software lets you pay out referral fees in cash, in store credits, and in gift card credits. You can adjust your fee amount and type of payout as needed, for maximum flexibility.

Use our Reward Builder to set up the referral fees of your choice. Select the type and amount of the fee you’d like to offer, and choose whether you’d like to offer a flat fee or a percentage of a sale.

Choose from:

• PayPal cash payments
• Wise cash payments
• Tango gift cards
• Coupons (if you’re offering store credit)
• Custom cash payments

If you prefer, you can also set up custom gift-type rewards instead of, or in addition to, referral fees.

Are referral fees effective?

Why would a business want to cut into their margins and offer others a referral fee?

More and more people aren’t trusting traditional ads. And let’s face it – advertising costs rack up quickly.

Your potential customers will always trust the recommendations of their peers far more than other forms of advertising, making referrals an especially powerful marketing tool.

Referral fees motivate people to share your brand and generate new customers, and the amount of customers gained through referral marketing efforts are often worth their weight in gold. These new customers only have a basis of trust with your brand, they’re also more likely to stay loyal to your business for longer periods of time.

By offering referral fees, any type of business can access client networks that are normally tough to tap into. If an existing customer has a whole network of people who would be perfect customers, it makes sense to enlist them as a salesperson, and pay them a referral fee for helping generate more customers.

Source

What’s a typical referral fee?

While typical percentage referral fees generally range from 5%-35% of the transaction value, that’s a wide range, and some companies offer even more due to a competitive market. It’s more important to select a referral fee that’s competitive yet sustainable.

There are a few approaches to figuring out your referral fee.

Many referral fees are calculated as a percentage of a purchase a referred customer makes. Or, you can also offer a flat fee, which works well if your margins are thin, or if you also employ a sales team or person (in addition to the referrer).

Based on our own data, flat fees are much more common across referral programs than percentage commissions are. 92% of Referral Rock programs reward a fixed amount, and only 8% reward a percentage of a sale.

Percentage-of-sale rewards are more common for affiliate programs and less common for customer referral programs. Compared to a flat fee, it can also be harder to come up with a percentage-of-sale amount that makes sense across products and services. So, many companies start with a fixed amount to make it easier to predict payout costs.

Here are four variables to consider when deciding on a fee for your company’s referral program:

1. How much are you already spending per sale?

• Are you already paying your own salespeople a commission? Or can a referral simply make a purchase themselves (meaning you’ll only pay one referral fee)?
• Does the purchasing process involve multiple steps?
• What does it cost you to offer your products and services?
• How much do your marketing efforts (including ads) cost?
• Once you make a sale, what is your profit margin?

If there is a substantial cost of doing business for the sale, you should set a lower referral fee percentage, or choose a reasonable flat fee.

2. How long does your sales process take?

Some sales processes take a long time to close. Whether your company is paying referral fees to individuals or other businesses, it’s always important to think about the length of a typical sales cycle.

For relatively long cycles, will a customer be able to earn a referral fee at any time the person decides to purchase? Even if it’s several months later?

These conditions must be fair to both the referrer and your brand. Be clear about when the relationship transitions from the referrer to your business.

3. 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 does your business get paid?
• How are funds received for the sale? Upfront or in several installments?
• Do you offer a recurring service?
• What’s your policy for refunds or money-back guarantees?

When cash is received helps you plan out your payment schedule. No matter what you decide, ensure you are making money in all cases.

4. What payment schedules will you use?

Depending on how you want to drive referrals, there are many different schedules you could use for referral fees. It all comes down to what will best motivate your referrers.

Consider these incentive structures:

• Higher amounts for the first successful referral (to motivate new referrers to get started)
• Increasing amounts based on the amount of referrals made (a tiered structure)
• A smaller referral fee for bringing in qualified leads, and a larger referral fee for bringing in sales (a multi-step structure)
• Contests, where you reward your highest performers within a certain time period

Will referral fees work for your business?

While offering monetary incentive will always attract attention, referral fees will only work if you have the following in place:

• Your brand’s products or services are seen as valuable.
• Your customer service is top-notch.
• And your brand is generating positive buzz.

You want to show customers that your business is worth the effort before asking them to help spread the word. A referral fee just won’t work if people aren’t excited about your products and services.

After all, why would someone share something if they don’t believe in it? It would only damage their reputation and social standing, which is something no referral fee is worth.

First make sure you have a strong brand and product you’re proud of, as well as a group of loyal customers, and then you can offer reward incentives to help grow your business.

Do you need a referral fee agreement?

A referral fee agreement, or finder’s fee agreement, is a formal contract between a referrer and the business owner that establishes the referral fee percentage or amount, expectations, and conditions.

You don’t have to outline a referral fee agreement if you’re running a traditional customer referral program. Instead, give a brief explanation of how customers can earn the referral fees, and quick access to your program’s other terms, on your referral program’s page or portal.

But if you’re working with afffiliates, ambassadors, or other more formalized referral partners, you should write a referral contract to clarify expectations on both sides.

This contract helps show that your company values the importance of professional conduct. Plus, the money involved can be significant, so a referral fee agreement can protect you in case something goes wrong.

What should be included in this type of agreement?

Role of the referrer:

• Do they forward leads to sales immediately?
• Or do they also perform marketing and sales tasks?

What is a successful referral?:

• Does a referral have make a purchase within a certain time period?
• Or must the purchase be worth a certain amount?

Compensation:

• How will the referral fee be calculated?
• Is it a flat fee or a percentage?

Payment conditions and fee schedules:

• When and how will you pay the referral fees?
• Do you have any detailed referral fee structures (like a bonus opportunity)?
• How will you handle return and refund policies?

Below is an example of a referral fee agreement:

What are the tax implications of referral fees?

Before deciding to implement offer fees, you must also be aware of the tax responsibilities associated with these fees.

• If a referrer receives $600 or more in referral fees within a calendar year, they must pay taxes on the amount they receive.
• If you pay a referrer more than $600 in a calendar year, it’s your responsibility to collect a W-9 form from them and issue a 1099 to them.
• However, if it’s a previous customer doing the referring, the amount you pay to the referrer can be considered a “refund,” “discount,” or “rebate” on a previous purchase.

Are referral fees legal?

Yes, referral fees are legal, but only within certain industries.

Most industries also don’t pose any requirements in order for a company to implement referral fees.

However, since referral fees are not legal for all industries, you’ll need to do some research to make sure you don’t set up an illicit system.

Highly regulated industries, such as real estate, insurance, financial services, and automotive industries sometimes have state or national laws, or license rules. Sometimes, these regulations do not permit referral fees, and other times, they outright prohibit referral fees.

For example, in real estate, agents can legally pay referral fees to licensed middlemen, but state and federal laws usually prohibit paying real estate referral fees to people without a real estate license.

It’s best to make sure your specific industry allows referral fees before going any further in the process.

Referral fee examples

Here are examples of the two main types of referral commissions, to help you understand how referral fees work for all parties involved. Let’s take a closer look.

Percentage structure

Jason Lemkin outlines a strong example of how referral fees could work for your software business. His example utilizes multiple referral fee percentages, depending on how much work the referrer puts in for your business:

Flat fee

A motorcycle dealer might offer flat referral fees, payable after a referred customer purchases a motorcycle. These fees are often around $100 each, as motorcycles are a bigger-ticket item sold infrequently. These sales also usually involve a salesperson at the dealership.

AT&T is another example, as it gives credits towards customers’ bills as a flat fee for referring customers. They also award the new customer $50 for opening an account, an incentive that makes earning the referral fee easier for the existing customer.

Set yourself up for success with the right referral fee

A referral fee encourages people to spread the message about a business, and then rewards them in cash (or a cash equivalent) for a job well done.

Make sure to choose your referral fees carefully, based on the cost of your goods, your sales price, how long it typically takes to close a sale, and other tax and legal implications. If you can set up a referral fee that’s attractive to others, and is reasonable for your business, you’re on your way to see the benefits.