I recently received the following question from a website visitor:

"People want to refer clients to us. How much each client will purchase will have a wide range. How much referral bonus should we give to the person who refers us to a client? Is it typical practice to keep giving a commission to the person for every order the client places? What do you recommend?"

Here is how I responded to this question:

Referral fees are very interesting because they can be handled in so many ways and because there are conflicting concerns that drive them. On the one hand you want to encourage referrers to make as many referrals as possible. On the other hand you want to encourage referrers to maximize the quality of each referral. What you want to avoid is a referral program that motivates referrers to supply a high volume of low-quality referrals.

Because of these conflicting concerns, you probably want to avoid a program that pays a small fixed dollar amount for each referral that is submitted. This type of program could motivate referrers to maximize the number of referrals while paying little attention to the quality of each referral.

Instead, consider paying a larger fixed dollar amount or a percentage of revenue or gross margin (probably a percentage of revenue because you don't necessarily want to give people more insight into your margins than you have to) for referrals that result in closed sales.

It often makes sense to pay this referral fee for multiple orders because initial orders may be small and it may take some number of orders to gauge the true potential of a new client. However, I suggest that you cap the referral fee so that it is only paid for a fixed number of orders or orders that are placed within a specified time period.

Here is the rationale for capping the referral fee: Yes, the referral is important because it opens the door to business you might not otherwise have had an opportunity to win. However, opening the door is just a small part of the sales process.

A salesperson still needs to qualify the opportunity, manage it through the sales cycle, and close the sale. Your company still needs to deliver the product(s) and/or service(s) and provide quality customer service. The referrer is not involved in any of these post-referral activities. As a result, their share of the rewards should be attractive, but limited.

Regarding the referral dollar amount or percentage, this is really something you have to determine based upon the profitability of your own company's products and services:

• If a referral fee is only being paid on the first order received, it may be as much as 5% or 10% of the purchase price.
   
• If the referral fee is being paid for a specific number of orders or the orders received during a specified time period, the percentage could drop to 1% or 2% of the combined order value. Or it could be a fraction of a percentage. Or it could be a fixed dollar amount.

You need to determine what you are willing to pay based upon the value to your company of the incremental business that results from the referrals.

©2009 Alan Rigg

About the Author

Sales performance expert Alan Rigg is the author of How to Beat the 80/20 Rule in Sales Team Performance, and the companion book, How to Beat the 80/20 Rule in Selling. His 80/20 Selling System™ helps business owners, executives and managers end the frustration of 80/20 sales team performance, where 20% of salespeople produce 80% of sales. For more FREE sales compensation information, visit http://www.8020sales.com/sales_compensation.html.