Should you offer/pay referral fees, and if so, how much?

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Randy Travis, Owner at Ramtra Home Value Improvements, in Huntington Woods, MI, asked this question at the LinkedIn Construction Business Owners Group:

What is a fair referral / lead fee? Do you pay a percentage or a set fee based on the project value. If a business partner gives you a lead do you pay for it if you get a job?

I know a retired builder that wants to work with me on a sliding scale referral fee (from 10% for under $2k to 4% for over $10k projects) where he would get a percentage of any job that he would refer to me. He has a 200-300 customer list he would contact. Claims he has always paid fees to others including other contractors, designers, architects and customers for years. He also feels he deserves a fee for any subsequent referral I get from the first customer.

I’m willing to pay a set amount – $100 for $5-20k, $200 over 20k but why would I pay someone an amount equal to my profit for an hour or two’s work to give me a name?

Not surprisingly, Travis received several entirely different answers to his question.  You can read them all by joining the relevant group (and while you are in the Linkedin.com space, you may also wish to join the Construction Marketing Ideas Group), but I will post consultant Michael Stone’s as probably the one that I would consider most relevant in the circumstances.

Referral fees should be the same % of total sales as your advertising budget. A job coming from a referral or from your job sign or from your business card, totaled up and averaged, will all cost you the same.

Most people make this “paying for referrals” far more complicated than it needs to be. I believe you can tell everyone and anyone that you pay a referral fee, but you, not them, set the standard. Paying anyone 10% for a referral and you have a 4% advertising budget means you are going to take that additional 6% from your profits. If you are willing to work for nothing, that is OK, but sticking to your advertising budget makes far better sense.

Of course, Stone assumes (and strongly recommends) that you advertise for business, a position you might think I would enthusiastically endorse, considering that my business earns more than 95 per cent of its revenue from advertising sales.  However, I’ve always believed that construction businesses can first start by picking the low-hanging fruit, especially encouraging repeat and referral business, more effectively.

To give you some other referral system models, you can look at Bobby Darnell’s referral system which you can download off my blog, where he rationally scales the compensation depending on the referral depth and quality — a soft referral is a $100 gift card, a full-press meeting and introduction results in a significant commission.   The reasoning behind this variation is logical; at the highest end, the referring person is essentially acting as a sales rep for your business, and might reasonably be expected to be paid a significant portion of the budget you would allocate to a sales commission (which Stone sets a separate line item/budget in business costs.)

Then, you could look at the model used by Feazel Roofing in Columbus, Ohio.  His staff freely passes out coupons offering a $50 referral fee AND a $50 discount on a roofing job — and then allows the referrer to sign over the $50 to the client, resulting in a “soft cost” discount of $100.00.  Fezael’s roofing here is brilliant:  Friends and family members, less concerned about ‘profiting’ from their relationship, will sign over the cash fee — and of course it is much less expensive to provide a $50 discount than $50 in cash.

So, what should you do?

In many ways, I think Michael Stone has it right, at least in the consumer marketplace.  You have little need to be generous with referrals especially if you are operating an organized and budget-centric advertising campaign.  If your referring bird-dogs are behaving much more like outside sales representatives, however, a compensation scale similar to Bobby Darnell’s may more sense.  That is the approach I take with  my own business, adjusting our internal sales representatives’ compensation to reflect the additional lead cost (and the sales representatives rarely if ever object because the work becomes an ‘easy sell’.)

Of course, we all know that the best referred leads come naturally and without expectation of any compensation, because our existing client is so enthusiastic about our service they simply want to share the good news with friends and acquaintances.  But if we are “relying” on this sort of passive business, you really should read my book — your prices may be far too low and you may not appreciate the power that effective marketing campaigns can provide your business (while reducing risk of instability/collapse in hard times.)

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  1. We charge builders in Bristol 5% for passing them jobs. We charge less for larger jobs (£100,000 to £499,99 it goes to 3%). It seems that having a fixed 5% across the board would be better. For our network of builders, having a series of lucrative jobs one after the other makes paying 5% commission well worth it.
    Now the recession has lessened and more building work is happening they all want the larger projects rather than the bathroom and other low profit jobs.

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