When, why, and how to monetize referrals

If you’re running a service business, making referrals to others is something that will become a core business activity. Much like any core business activity, there’s a important question to ask: should you monetize it?

Some people avoid introducing financial incentives into referrals and default to referral karma. There’s merit to this approach, and it’s certainly the path of least resistance. But there’s also good reason to monetize referrals, and you should make a decision about which approach is right for you. 

Referral compensation is more prevalent than most think

It takes some people a while to warm up to the idea of monetizing referrals. Referral compensation can feel like an awkward thing to broach at first. But over time, service providers discover the truth lurking beneath the surface: referral compensation is pervasive – it’s just not talked about much in public. And usually after making some referrals where they made someone else a lot of money, they wonder, “should I be making money off of this?” 

"With my last agency, I would always refer clients to a PR agency owner I knew. We met in-person and he insisted on paying for my coffee. When I asked why, he said that I’d referred him $3M in client work that year. I had no idea. Needless to say, getting a coffee in return for $3M in work seemed a little unbalanced. When I started my new consultancy, I brought referral agreements into the model from day 1."

The truth is, 20% of self-employed service providers and 50% of agencies offer some formal compensation for referrals. And anyone getting leads from marketplaces is used to paying over 10% for the leads the marketplace send. Bigger agencies like Hawke Media and BlairesDev have massive referral programs with hundreds of people generating over 20% of their business.

And there’s good reason for referrals being compensated: business development is one of the most painful business challenges for most service providers, and it's the thing they hate doing the most. If they could compensate others to generate warm referrals for them rather than having to spend a bunch of time on sales and marketing, that’s money well-spent.

It follows that if you’re referring business to others, you can get compensated for this as well. In fact, monetizing referrals can actually be better for everyone – you, clients, and the people you refer to. Clients benefit because by making it a core part of your business, you’re incentivized to build your network and make really great referrals. Your referral partners benefit because having incentive alignment means you’ll go the extra mile when making referrals to help someone close a deal. And you benefit because by getting compensated for this work, it’s something you can sustainably invest energy into without wondering if and when people will reciprocate the favor.

I had no idea people made money on referrals until I was included on an email thread where a speaker I knew casually confirmed that they would get five-figures for a quick referral he made.

The golden rules of monetizing referrals and how to follow them

You should only monetize referrals if you’re willing to do it the right way. There are two golden rules to follow when monetizing referrals:

• Only ask for referral compensation if you are willing to offer it in return: This is not only fair, but it makes the process of broaching referral partnerships a lot less awkward when you’re willing to compensate someone for sending you referrals as well.‍
• Avoid preferential treatment based on your compensation: Making referrals based on who is paying you the most is a conflict, and is against the interests of your client. You should always try to give clients options they can choose from to be the most client-centric.

There are a few ways to approach referral monetization that ensure you follow these golden rules and remain client-centric. 

1. ‍Try to align on terms before there’s a live referral. If you have service provider you trust, it’s always better to broach a referral agreement before there’s a live referral to make. On the other hand, it can be a little awkward to bring up a referral agreement when you have a live referral you may want to make to them. It can come across as gatekeeping or as explicitly quid pro quo, even if that isn’t the intent. It’s best to have a standard referral terms you can send to someone as soon as you realize that they would be a great partner. That way, you can broach that right away, and know that if something comes up in a week or a month where you want to refer them, you’ve already gotten the referral agreement out of the way. That said, this isn’t always possible. Sometimes it takes a live potential referral to make you realize who in your network would be a good person to refer to. In those cases, it’s fine to present a referral agreement, but it should be positioned as a longer-term partnership – not just something for this specific transaction.‍
2. Avoid negotiations: Your goal when forming referral partnerships is to align your interests with people you can share referrals with in a way that everyone is comfortable with. It’s not to try to squeeze the most compensation you can. Ultimately if you have a standard referral terms you have with all of your partners, you should just say what it is. In most cases they’ll just accept. Alternatively, if they already have a referral compensation structure that they do with others that’s baked into their business model, it may make things easier to just use what they’re comfortable with. Either way, you want to keep this simple. ‍
3. Provide clients with options. In general, it’s always better to give clients options of service providers you recommend, rather than just one option. Giving clients only one option implies a strong recommendation, and providing options gives them more agency to choose who they want to work with and makes you look good. Best of all, helps you avoid the scenario where you’re giving them one option because of who you get compensated by. When providing options, you may even give them a shortlist of people which includes people who do not compensate you for referrals. Providing options keeps you client-centric.‍
4. Disclose referral agreements. It’s always safest to disclose that you have referral agreements with people when making referrals. This doesn't have to be overly formal. A simple sentence in an email will suffice, like “quick disclaimer: I have referral agreements with some of these people because we do so much work together.” You don’t need to get into the details here. You just want to disclose and make sure the client knows that you’re recommending people who you think are best for the job – not just people who are paying you.

Monetizing referrals can be a win/win/win for everyone and create a powerful new revenue stream. Just make sure you're approaching it the correct way.