Broaching referral arrangements with partners (without the awkwardness)

Forming referral partnerships with other service providers can be a powerful part of your business. It can create a meaningful revenue stream by compensating you for the valuable referrals you make, and it creates stronger incentive alignment between partners. Ultimately it can make it more sustainable for you to be generating and sharing business with others.

But broaching and negotiating these arrangements is often awkward. It doesn’t have to be. There are a few rules to keep in mind when forming referral partnerships to get compensated for referring business.

1. Your top priority is always to help the client. Referrals reflect on you, so you should never find yourself in a position where you’re choosing to refer a client to a less ideal service provider over a more ideal service provider because of financial incentives.
2. The goal is to align incentives; not to “win” a negotiation. Ultimately if you “win” a negotiation on a referral agreement, the service provider will be less excited to support referrals that come from you vs. other referral sources. Referrals that come from you will be seen as more expensive. Therefore it’s best not to think about this as a negotiation but rather a way to align incentives while serving clients’ best interests. ‍
3. Whenever possible, opt for consistency and simplicity. If partners of yours already have standard agreements in place for amounts they’re comfortable paying to their referral partners, then best to just snap to that agreement than try to negotiate something custom (unless it’s so small that you don’t feel like you’ll be incentivized to keep them top of mind).

When adding someone to your referral network, you’ll want to (1) confirm that you can send them referrals, (2) align on referral terms, and (3) collect information on their services that can help you make referrals.

Confirming that you can send them referrals is the easy part. Aligning on referral terms is a bit trickier. Let’s assume you want to get compensated for making referrals. Remember our golden rule: “Only ask for referral compensation if you are willing to offer it in return.”

Step one: Come up with a reciprocal referral agreement

Broaching a reciprocal referral arrangement is a lot easier and less awkward than asking someone to pay you for the referrals you send them. It shows that you have mutual trust and that you’re willing to compensate them in the same way you’re suggesting they compensate you. Even if in practice one partner sends more referrals than the other, being willing to reciprocate overcomes a lot of the awkwardness of these conversations.

While there are more detailed brass-tacks terms that go into referral agreements, the more important priority is to simply communicate the referral compensation. There are three things an agreement should answer: 

1. Referral incentive amounts

Referral incentives can be fixed (e.g. a flat amount for successful referrals) and/or variable (a percentage of revenue).

Usually this is really simple and based on a single revenue stream (e.g. services revenue). For example, a consultant might offer: “10% of revenue from consulting services.”

Sometimes, there may be other services or income streams that you might want to layer on. For example, some consultants may offer consulting services, sell courses, and have other revenue streams. That same consultant might offer: 

• 10% of revenue from consulting services
• $250 for any course participants

2. Limits per client

When discussing referral agreements, one thing service providers can get concerned about is paying out referral fees in perpetuity for a client or paying out a lot if they end up upselling the client.

There are two levers that are used to limit the amount that someone pays for a referral:

1. A term length: this limits the amount of time in the client relationship where referral fees are paid out. The most common term length is 12 months, but some people may prefer 3 or 6-month term lengths. With a 3-month term length, the service provider would only pay out referral fees for the first 3 months of the client relationship. 
2. A cap on referral fees per client: Another common limiting factor is capping the total amount of referral fees paid out. Common limits are usually ranging from $5K to $25K. 

With these in mind, here’s a good standard referral agreement we see a lot of:

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Step Two: broach a referral agreement

When broaching a referral agreement, you want to share the referral agreement you use with others and state the referral compensation you offer in return. There’s a chance they may have their own referral agreement they already use with partners that they might prefer. You can decide how amenable you want to be to using their own referral compensation. Here’s a draft of what the tone and messaging might look like:

If you’re going to start broaching referral terms with people, you should also be collecting information about their services that you should be collecting.

Remember to keep this conversational. You should only be broaching this with people you already trust. The goal is to make sure that everyone is comfortable with the arrangement, so it's worth keeping things lightweight when broaching it before getting into the brass tacks of the details.

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