Referral Fees: Best Practices for Success

This short guide may be the most valuable reading you’ll do for a long time to come. Benefiting from high-quality, low cost referral leads is a simple concept, but tracking profits and payouts can be frustrating without the right tool.

You can learn more about how to build a referral program with the articles below

On this article we will take each aspect of referral sales & marketing and break it down for you in simple terms. After reading this guide, you’ll understand the basics of how to approach this effective source for new leads and reap the maximum benefit.

#1 - Who (or What) Can You Trust?

We understand. It isn’t easy to hand-off any aspect of your business to an entity outside of your close-knit team. Who is trustworthy to represent your brand? Who is looking to support your objectives rather than exploit opportunities you’ve worked so hard to create?

Assigning an important responsibility to a third-party is more difficult today than ever before. Why? Today you’re not always dealing with a “who,” but a “what.” Tempting sources for referrals now come in the form of faceless websites. So, are you comfortable with a business “partner” you can’t shake hands with or look in the eye? Can you “ink” a deal with a new sales agent after only a phone call or website chat? No wonder business owners prefer to be cautious around platforms promising a gold mine of new business leads.

But fear not. A sales agent can be a good thing. Let’s review some of the basics behind referrals and how to use them to your greatest advantage.

#2 - What Is a Referral Fee?

When someone or something brings you a qualified sales lead, it usually comes with a cost - a compensation structure that binds you to reward that source of new business with what’s called a Referral Fee.

The compensation you pay to the source of the lead can be tied to simply the lead itself or it can be assessed on the value that sale ultimately brings to your business. The latter is considered a sales commission structured fee.

Let's take the roofing industry as an example: if you converted a lead into a $15,000 roof replacement job, and the referral fee structure you agreed to was 5% of the gross project cost. Therefore, you owe the referral agent $750.

#3 - Sales Is Their Specialty

Traditionally, referral fees were paid out to independent sales people. Brand advocates who work on behalf of your company to connect you with property owners needing roof or remodeling work. Since your #1 talent is installing new roofs, these sales agents do the job you’re too busy to do yourself and most of them are good at what they do.

Third-party brand advocates have access to a network of qualified potential customers. In a best case scenario, these sales agents have a unique insight into your line of work. They know where to find good prospects. At some point they decided that their experience, their sales talent and their network of potential customers has real value. They chose to make a living endorsing companies like yours and handing you qualified prospects.

#4 - Online Referral-Generating Sites

Today, brand advocates don’t always come in the form of someone, but rather something. The internet is full of lead-generating platforms such as Angie’s List, Home Advisor, Houzz, Tackl, Broadly, ThumbTack, Porch and there are many others, including services aimed specifically at delivering leads to roofing contractors.

#5: So, How Does a Referral Fee Work?

Online referral services try to make it very easy for a customer to enter their contact information. They normally obtain basic information about the work they need done. After they complete their information, the referral website shows the customer one or more reputable service providers in their area, which can likely meet the project needs. Referral websites are invariably free to customers/home owners, requiring only that they complete a profile. For participating businesses in the referral network, a contract is agreed upon which holds the business responsible for paying either a flat fee or a commission when a sale occurs.

#6 - What’s the Cost of a Referral Fee?

Referral Fees that are based on the value of a particular job, as opposed to flat fees, and can range anywhere from 5% to 25%. In most cases, a roofing contractor can negotiate with the sales agent. Some things to consider when determining a Referral Fee are:

- What will be your all-in cost to complete the project?
- What will be your profit margin?
- What would have been your time and expense in getting this customer yourself?

In general, the bigger the project the smaller the percentage which a Referral Fee is based... in terms of a percentage commission that you should pay. After all, even 3% of a $20,000 roofing job is $600. Be prepared to wrangle because it’s not uncommon for an agent to ask for 15% or 20%. And you can not always justify passing that full expense of your expected commission on to the customer.

If your normal margin on a project is 40% and you’re still competitive in your market at that margin, it might be a little less painful to take on a referral from an agent who wants 10%, 15% or even 20%. You’ll still come out on top, plus, one you finish you’ll have a quality project to show off to your next prospect will always help sell your company!

#7 - Recommendations on Negotiating Fees

1. Contract

The referral sales agent presents the contract. The referral contract is a formal agreement that outlines the framework of the relationship and the structure of fees.

2. Client Approval

As the contractor and the one whom will benefit from the referral, you’ll review and approve the contract.

3. Negotiate the Referral Fee

Once you obtain a referral from the sales agent, and figure out the general scope of work to be completed, they will prepare you to negotiate the Referral Fee. Let’s review the types of sales commission structures.

#8 - Types of Sales Commission Structures

1. Total Revenue

Total revenue refers to a fixed commission rate applied to the total revenue generated by a salesperson. To calculate a Total Revenue-based fee, just multiply the commission rate, i.e. 10% by the total amount of sales that the agent helped to broker i.e., $10,000. So, $1,000 is the fee paid to the Advocate. Simple!

Total Revenue compensation works well when you are building your business and you don’t have a dedicated salesperson or sales team of your own.

2. Net Sales

Net sales structured fees are like Total Revenue models except, in a net sales-based scenario, you pay a percentage, i.e. 30% of your profit on a project. So, if you project nets $4,000 the Finder gets $1,200.

3. Tiered Performance

This reward structure pays sales agents based on performance. It can scale up or down according to the accomplishment of defined goals. This fee structure incentivizes selling agents. In the event they achieve the more aggressively defined goals, the higher their fee will be!

For example, if a project brokered by the sales agent is valued at $1,000 to $10,000, they'll earn a 10% commission, but if they bring you an opportunity that turns into a $10,001 - $50,000 project, they'll earn $12.5%... and so on. Talented, confident and ambitious sales agents perform well when there is a tiered incentive structure, like this.

4. Performance Multipliers

This too is an incentivized model. The difference is that this type of structure can be based on company goals. Sales agents can be tasked to increase total sales by 20% or concentrate on contract renewals for 20% commission.

In other words, the performance multiplier structure is effective when a company aims to improve its performance in specific areas needed to strengthen their overall business.

5. Blended compensation structure

This type of structure is the most common. It simply refers to a payment structure that involves a base salary plus commission. Further incentives for the sales team come in achieving and exceeding set sales quotas. This structure is normally applied to internal sales teams.

#9 - Key to Making Referral Fees Work

Agents need to be motivated by your compensation plan. This means structuring fees on fair and achievable terms, as opposed to wildly aggressive, unrealistic goals. Keep in mind that your sales agents will often access to a valuable network of prospects. They bring to the table a potential for you to grow your business, so work with them in a spirit of partnership and collaboration.