Should You Offer Referral Fees To Grow Your Business?
It makes complete sense right? Warm contacts have the highest trust levels and are most likely to give you business. So if instead of just selling to your friends, you get all your friends to sell for you to their friends, and so on, and your business will grow much faster. And if you pay your friends for every sale they bring you, the more reason they have to recommend, right?
Let’s put this idea to the test. If we pay you a referral fee for every client you introduce to us, how many clients will you bring to us?
Some time ago, I was advising a software company, and despite running a referral program, they still had to work harder than they thought was necessary to win deals. The sales multiplier effect of the referral program did not materialize.
It’s not that referral fees don’t work, though, but whether referral fees as a business growth tactic is strategically suitable for your business. Generally, you would benefit from a referral program if these 3 points are true for you:
- Your industry does not forbid the payment of referral fees.
This is obvious.
- Your referral program does not lead to a conflict of interest.
Imagine your friend recommended you strongly to get a supplement product, and then you realized your friend earned 5% referral fee off your purchase, how would you feel about the company selling the product? Now imagine if you had gone direct to the supplement company and you could have gotten the product at 4.76% cheaper than if your friend referred you. Will you start referring your friends as well?
- You can keep the referral arrangements strictly between you and the referrer.
So to prevent conflict of interest, you need to protect your referrer. You need to be able to separate referrer from customer – else a customer would be able to find out your referral fees by posing as a referrer. You need to choose your referrers carefully – else a referrer may leak the information, accidentally or intentionally. You need to be able to manage the referrers – else you might miss out on paying referral fees if the customer makes the purchase at a later date or makes a repeat purchase on their own.
If you are able to keep to the 3 points above, you could probably get some results from running a traditional referral program. You are basically paying people for their network and efforts in selling on your behalf, while saving on marketing costs. Unless your target market is very tricky to access, a traditional referral program may not be the most optimal way to grow your business.
Many businesses implement programs that are a little more complicated than just paying people to introduce their friends. For more optimal business growth, you might want to consider:
- Transparent referral programs.
By making it clear that you run a referral program, that your referrers earn a referral fee, that there is no difference in pricing if customers do not go through a referrer, that referrers should make known that they earn a referral fee, or even being transparent about your referral rates, you would have resolved the issue of conflict of interest. Businesses that work with agents, brokers or consultants could adopt this tactic.
- Triple-win programs.
Besides being transparent, businesses could also design a program where both the referrer and customer benefit from the referral. Aggregator platforms typically implement such programs. Retail or service outlets may also employ bring-a-friend promotions, which can also be considered a volume discount tactic.
- Fee-less programs.
Not every reward has to be monetary in nature. Many businesses that have a communal aspect use this tactic, for example gaming apps may reward referrers with in-game benefits and utility apps (such as ride-hailing or social media) may reward referrers with higher tier functions. Eateries may also package their bring-a-friend promotion in the form of an extra menu item on the house.
With the advent of technology to help manage referrers and track referrals, referral programs can be designed and implemented creatively to accelerate business growth. But in the end, businesses should still strategically evaluate if a referral program should be their priority investment amongst various other lead capture tactics such as affiliate marketing, event registrations and advertising.