I have two different people wanting to establish a referral system for referring web clients to me. They both have people they are wanting to refer right now but want to know what I will pay them for the referral. I can think of two ways to do this - a flat fee for the referral or a percentage of the fee charged to the client. There is probably other ways as well. I would love to hear what others do and any other advice you might have before I embark on this adventure.
Percentage, I think. And be generous so they feel it is worth their while to refer clients to you in the future. 25% is a nice round number. Put your prices up a little bit so it only costs you half of that.
Most companies with referral kick backs pay on a percentage basis… Depending on the size of a typical client it could be 2 or 3% or much, much higher. What really factors into the referral cut is the level of “referring”… if someone is sending you a name to call that’s worth a lot less than if they sit down in a meeting with you after prepping and see the sale through. You’ll have to review your margins and client value to figure out what cuts make sense.
If using a percentage I guess it depends on how much the project is worth. If the project is for example $3000, then a 2 percent referral fee would be a measly $60. Who would even bother collecting that? And if you are perceived as cheap, then people are less inclined to help.
If the project is worth $30,000, 2 percent would be $600. Better, but not great. However, I feel that 25% in this case would be too much ($7500). In this case I would perhaps go for 10%. So I guess it really depends on the size of the project.
Also, the bigger the project, the less likely it is that you are going to be working on it just by yourself. If you hire staff you have to be much more careful watching your margins.
Whatever the case, in business, be generous, it always pays off.
This isn’t a sales commission though, the referrer has done no work. They’re simply exchanging contacts. I wouldn’t even pay a salesperson 25% commission - that’s just way too high. I might be willing to agree to 5% referral fee for the first project. If the project was $5000, that would be $250 just for giving someone a name.
Otherwise, just say no. How do you know these will be good clients? That they will even have a budget? You’re going to be taking your time and sitting down to evaluate their needs. I’m sure this person is not going to pre-screen them to your standards. So you’re going to have to invest your time and money into the potential client and may not even make the sale! They could say no.
I will tell you this… it sounds like the person who wants to refer these clients to you is just out for a quick buck. If he was REALLY good at networking, he’d send you the referrals for free because he’d know it’d come back to him ten-fold.
We receive a large portion of our business from referrals from both colleagues and satisfied clients, and we’ve NEVER paid a commission for a referral. They help us out and we help them out.
I guess there is another issue at hand as well. If you or your team is already fully booked and it is just a question of working with this client or another client there is really no reason to abstain from 25% of your revenue. If you, however, are not fully booked, I would argue that 75% of something is better than 100% of nothing or whatever percentage you feel comfortable with.
That is assuming that his profit margin on each job is greater than 25%. After rent, utilities, labor/salaries for employees, taxes, etc. I can almost guarantee you that most web developers’ profit margins are less than 25%.
If you discount the project below your cost, you’re actually losing money by taking the project… and that doesn’t take into account the opportunity cost of taking a client at 75% typical revenue. Once you sign, if another potential client comes around wanting to pay 100% you have to put them off (unless of course you have capacity to do both at the same time, but you get the idea).
Well said beley. As I mentioned before… people use the term “referral” very loosely. I could give anyone here a list of companies and contacts who need websites which would be “referrals”. Step is up a notch and I could introduce you to those contacts… an even closer referral. Or we could get things really going and I could sell them on the website, rough quote it and bring you to close the deal. All 3 are referrals and all 3 have completely different value to you as a sales person and/or business owner.
On the exact opposite side of the coin, you have to look at project size and value. Even if you nearly closed a sale for me, paying 3-5% (the referral fee range one company gives me for business) on a $1500 contract would be absurd. I’d rather just give you the name, make a call on your behalf and have you owe me one. On the other hand, a 3% fee on the redesign I was managing 2 years back would have equated to tens of thousands of dollars. Margins in both cases are not likely to make 25% “affiliate style” fees work but they certainly would never work on a huge project.
10% for a good lead that’s ready for you on a $1500 contract would seem perfectly fair to me but then again, I’d rather have the good will and favor than the $150. On the other hand, 3% on a 6 or 7 figure deal is very nice.
In the end, there is NO magic number. There are loads of successful web firms who don’t bother to pay referral fees at all - they don’t need to. There are loads of firms who would happily pay 50% but they can’t service they clients well and they businesses don’t succeed. There are highly capitalized start-ups who are trying to drum up business and will spend loads of money to get new clients, but there are also lots of people sending crappy referrals which makes the whole deal painful.
And, there is everything in between.