Is it a good idea to pay a fee for referrals?

Q & A by C.J. HaydenWe all want more people to refer clients to us, and one way to encourage more referrals is offering to pay for them. By offering cash instead of merely our thanks or a small gift, it’s possible to increase the number of referrals you will get. However, this practice isn’t appropriate in all circumstances, and may have some unintended consequences. So you’ll want to consider carefully whether it makes sense for your business.

In many industries, paying referral fees to those who send you clients is a common practice. For example, professional speakers, real estate brokers, and personal injury attorneys often pay referral fees to colleagues in the same field who refer business to them. A speaker who is already booked for a certain date might refer that engagement to another speaker and receive a fee in return, a real estate agent might refer an out-of-area prospect to a local agent and be compensated for it, and a business attorney might refer an injured client to a personal injury lawyer.

In addition to intra-profession arrangements like these, professionals in a wide variety of industries may offer a referral fee to their clients, or to contacts in their personal network, in order to encourage more referrals. When a referral fee is paid to a client, sometimes it’s in the form of a discount on the professional’s bill, or a coupon good for future service, instead of sending a check.

There is no standard amount for a referral fee. Some professionals pay a percentage of the resulting business, which may range from 10-30%. Others pay a one-time bonus, which could be anything from a token amount up to hundreds of dollars. (For one example, see a Sample Referral Fee Agreement.)

Referral fees like these can be a way to reward someone for taking the time to speak with one of your potential clients and find out what that client’s needs are. They may encourage your referral sources to keep you in the front of their minds. If you offer a referral fee and your competitors don’t, it may encourage your contacts to make the referral to you instead of someone else.

But there is a downside to paying — or accepting — referral fees. Some people who might be happy to refer business to you will not be willing to accept a fee. They would prefer to base their referrals on who they believe is the best person for the job, and don’t want their advice to be biased by getting paid for their recommendations. Or, they may be willing to accept a fee, but have a policy of disclosing any payments to the person they are referring. So any clients they refer may know that you paid cash to get their business, which may not be what you had in mind.

Also, many organizations and some professions prohibit their members from accepting referral fees. Corporations and educational institutions, for example, often forbid employees from accepting any gift from an outsider with a value of more than $25. In the medical profession, there are both legal and ethical prohibitions against receiving any sort of compensation for referrals to other practitioners or facilities. And real estate agents are prohibited by law from paying referral fees to unlicensed individuals.

If you decide you’d like to try offering referral fees under some circumstances, a wise approach is to discuss the referral fee option individually with each person you’d like to offer it to. That way you’ll discover how open they are to the arrangement, and be able to judge whether paying a fee will actually bring you more referrals, or if they would be happy to refer you business in return for no more than your thanks.

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