Building a collective of service providers that exchange referrals

Why people build collectives

A collective is a collection of freelancers, consultants, and small firms who collaborate on and share client opportunities with each other. Service providers participate in these communities to help with some of the business development challenges of growing their service business. Members of referral networks can get new client referrals from the community, but also can more confidently sell a breadth of services to clients because they have a curated collective of people they can always refer to or team up with on projects.

Collectives are becoming more common as more and more people are seeking more flexibility and independence in their professional lives. If you know a lot of high-quality people who are starting to do their own consulting, then you may be in a good position to build a collective. People who build collectives can make a lot of money, help a lot more clients, and help their network get more opportunities. But rather than a typical agency approach where you need to hire a bunch of people, collectives are more egalitarian and enable you to grow a lucrative business while maintaining flexibility.

When thinking about starting your own collective, the two most important things to figure out are (1) generating business for the collective, and (2) recruiting the right members who can serve clients’ needs. This is a bit of a chicken-and-egg problem, so it’s important to try to nail down who your target clients would be and the right umbrella of services that they want to provide to those clients. Members of collectives generally have diverse skills/services, but serve the same target customer. This maximizes the amount of business that can be shared within a collective.

It’s a helpful first exercise to identify the target audience you want to focus on, umbrella of services you want to provide, and the different people within your network who you think would be good to include.

To give you some inspiration, here are some great examples of collectives out in the wild:

Pelagic

• Target audience: CPG and other physical consumer product companies‍
• Service umbrella: Operations related to launching physical products which focuses on

THE BOARD

• Target audience: Primarily brands in beauty, fashion, media, or DTC products
• Service umbrella: executive-level consulting on creative, sales/marketing, operations, and finance

The Venn Collective

• Target audience: Generalists with some focus on sports and entertainment organizations
• Service umbrella: focuses on organizational talent development

The Tack Crew

• Target audience: B2B startups and scaleups
• Service umbrella: GTM services ranging from RevOps to Content marketing and everything in between

Matter

• Target audience: C-level executives at mid-sized companies
• Service umbrella: Helping leaders with strategy, culture and team alignment

Chameleon Collective

• Target audience: Generalist
• Service umbrella: Brand, marketing, experience, commerce, and sales

Informal

• Target audience: Companies/people bringing physical products to market
• Service umbrella: Services to bring physical products to life (design, engineering, manufacturing, sourcing, branding/marketing)

Arch Collective

• Target audience: Generalist
• Service umbrella: Creative and marketing services

Alpha 1 Collaborative

• Target audience: Generalist
• Service umbrella: Fractional C-suite advisors across finance, branding, sales, and others

Creating aligned incentives for sharing business

One of the defining characteristics of a Collective is that members are incentivized to share business with each other. If you’re thinking of starting a Collective, you should feel confident that you personally can generate a material amount of opportunities for your members. You can also incentivize members to share business with each other, but you shouldn’t just rely on your members to generate all of the referrals.

There’s a lot you may do to build trust and facilitate referrals within your network – you can recruit new members, you can build community, and even feature members to showcase their expertise. But the more important thing underpinning all of this is aligning incentives so that everyone has financial motivation for sharing opportunities with each other. 

By creating shared referral terms for your Collective, you help everyone skip the awkwardness of broaching referral agreements and figuring out what’s a fair amount to be compensated for referrals. Shared referral terms for Collectives are broken down into two parts: 

A referral incentive for business that members win: In most Collectives, there’s referral incentive in the range of 5%-20% of revenue that members pay for business they win. You can add additional terms that limit the amount that they’ll pay. This could be a term length (e.g. 12 months) or a cap on the amount of referral fees they pay for a single client (e.g. $10K). 

Referral incentive splitting: With members paying referral fees for business they’ve won, you need to determine how these fees get split. There are two roles that receive referral fees – (1) ownership (which could be you or even several others you bring into ownership), and (2) the originator (whoever in the network generated the business being referred to someone else). A really simple way to do this is to just split the referral incentive 50/50 between ownership and the originator. 

Let’s look at a practical example of a $30K contract (e.g. $5K/m for 6 months) with a 10% referral incentive split 50/50 between ownership and the originator. In this case, the ownership makes $1.5K from the referral and the originator makes $1.5K. If you as the owner were the person who originated the business, then you’d get the full $3K.

• Deal size: $30,000
  • Referral Incentive: 10%
  • Portion to ownership: 5%
  • Portion to originator: 5%
• Total Referral fee: $3,000
  • Portion to ownership: $1,500
  • Portion to originator: $1,500

If you extrapolate this within your network, you can see how lucrative this can be for everyone. 

Suppose you have that 10% referral fee with a 50/50 split, and there are 10 opportunities with an average deal size of $15K referred each month – 3 by you and the other 7 by members. You’d be making $117K per year – $90K as the owner and $27K from the deals you originated. A member who makes 1 referral per month would make $18K per year in passive income.

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