What is a reasonable referral/lead fee? Do you pay a percentage or a flat fee based on the value of the project? Do you pay for a lead given to you by a business partner if you obtain a job? Let’s find out!
I know a retired builder who wants to work with me on a sliding scale referral fee (from 10% for projects under $2K to 4% for projects over $10K) where he would get a percentage of each job he refers to me.
He has a list of 200–300 customers that he would contact. He claims he has always paid fees to others for years, including other builders, designers, architects, and customers. He also thinks he should get paid for any more referrals I get from the same person.
What’s the ideal commission?
We are happy to pay a specific sum – $100 for $5-20k, $200 beyond $20k – but why would I pay someone an hour or two’s work to give me a name?
Not surprisingly, Travis received a variety of responses to his question.
Referral fees should be calculated as a percentage of overall sales, much like your advertising budget. A job obtained through a referral, a job sign, or a business card will all cost you the same amount when summed and averaged.
What are others doing?
Most individuals make “paying for referrals” way more than they need to. I believe you can inform everyone and anybody that you pay a referral fee, but you, not them, set the standard.
If you pay someone 10% for a referral and you only have a 4% advertising budget, you will deduct that extra 6% from your revenues. If you’re willing to work for free, that’s fine, but adhering to your advertising budget makes a lot more sense.
Of course, some people advertise for business, which you might think I would joyfully support, given that my business derives more than 95% of its revenue from advertising sales. However, I’ve always believed that construction enterprises can start by focusing on the low-hanging fruit first, especially encouraging repeat and referral business.
To give you some other referral system models, check out Bobby Darnell’s referral system, which you can download from my blog, where he rationally scales the compensation based on the referral depth and quality—a soft referral is a $100 gift card, whereas a full-press meeting and introduction results in a significant commission.
The reasoning behind this variation is logical; at the most extreme, the referring person is essentially acting as a sales rep for your company and could reasonably be expected to be paid a significant portion of the budget you would allocate to a sales commission.
Friends and family members, who are less concerned with “profiting” from their relationship, will sign over the cash fee—and of course, it is much cheaper to grant a $50 discount than $50 in cash.
Conclusion
You don’t need to be generous with referrals if running a well-organized and cost-effective advertising campaign. That is the method I employ in my own business, raising the salaries of our internal sales reps to reflect the higher lead cost (and the sales representatives rarely, if ever, complain because the work becomes an “easy sell”).
Of course, we all know that the best-referred leads come organically and without any expectation of reward because our existing clients are so pleased with our service that they just want to spread the word to their friends and acquaintances.
Last Updated on March 26, 2019
