Is Paying Referral Fees Wrong?
June 14th, 2006 by Bob Bly
A colleague, MA, recently referred several potential clients to me.
When I thanked him, he said: “No need to thank me. When you do a good job for my clients, you make me look good — and that’s all the thanks I need!”
I give my clients referrals to other vendors I know and trust for the same reason MA does: to help my clients.
Tha’s why it shocks me when vendors approach me and say: “Send business to us and we’ll give you a referral fee.”
I always refuse such arrangements, for two reasons.
First, I consider it my duty to my clients to refer them to the best vendor for the job — not the one who pays me.
And second, clients come to me for objective, unbiased advice. If I am getting a kick-back from the vendor, how objective can my advice to use their services be?
So I never accept referral fees from vendors … nor do I pay fees to get referrals.
Do you agree with me that paying for referrals is wrong? Or am I missing the boat on this one?
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June 14th, 2006 at 5:26 pm
This actually reminds me of when I used to help folks create and improve Web sites…and offer Web site critiques. I stopped helping people do the Web making because I realized that if I made a suggestion for a Web site improvement and then say…I can do it…the potential client wouldn’t/shouldn’t trust me. Now that I only critique sites, I can tell a potential client it doesn’t matter to me if your site is perfect or terrible…it won’t help me either way so my critique will be objective.
If you get paid for a referral, you should say so.
Joel
June 14th, 2006 at 6:36 pm
Bob,
John Kremer (http://openhorizons.blogspot.com/) has a good approach. He has a special website where for recommendations. At the top of the page he says upfront that he gets paid a commission, but he believes they are good products and services.
I think that’s fine. Like an affiliate program, but more full disclosure.
Morty
June 14th, 2006 at 6:38 pm
Oops… Started to write “where he makes recommendations” changed it to “for recommendations” and forgot to take out the word “where”! Darn shame you can’t go back and edit these comments!
Morty
June 14th, 2006 at 10:05 pm
Bob, thanks for the post.
I agree with Morty - it’s not as simple as whether referral commissions are ‘wrong’. To an extent it probably depends on the product, but ultimately disclosure is the issue. If someone thinks that you’re referring them because the product is good, and it then transpires that you’re getting a ‘kickback’, of course - that doesn’t look good.
But if you say something along the lines of, ‘I do get a commission for recommending these guys but I would recommend them *anyway* because they do good work’, then the referee is fully informed and there’s no damage to your reputation.
June 15th, 2006 at 6:58 am
I think, that getting money is not bad by itself.
What is really bad? If someone acts against his client’s interests to get money — that is bad.
June 15th, 2006 at 7:29 am
When I have questions like these, I wonder how it would be handled by the general contractor who has worked with us on a series of home improvement projects over the past 4 years.
Sometimes he just says, “Call so & so and tell ‘em I sent you.” We make our arrangements with that person directly, and I’d be pretty surprised if there was any kickback to the contractor, but - realistically - I have no control over people’s private arrangements.
On some projects, he just says, “You might want to do it this way….” If we like his idea, we invariably ask if he can take care of it for us. I have never had the feeling he’s trying to push anything on us, or that his advice is colored by the fact that he might actually be paid for doing the work.
I wouldn’t ask for or pay referral fees myself. But I also don’t feel odd about recommending work to a client that I’ll end up doing … if the project is right for them. (Bob Bly once published a great one-line “Email an idea to a client” script/idea that I have used to very good effect. And that’s nothing but suggesting a project to a client.)
June 15th, 2006 at 8:10 am
Morti: I have the same “recommended” page on my site as Kremer uses, but that’s for products, like e-books and courses. I take an affiliate commission on Internet product sales, because it is standard practice to do so, and I disclose that I get commission. But on services? No. If a vendor wants to pay me a 10% finder’s fee, I tell him: “Don’t pay me the 10% … take 10% off my client’s invoice instead.” EVERYTHING I do is for the benefit of the client.
June 15th, 2006 at 2:36 pm
Bob,
I admire your integrity. But I’m not sure I agree with the distinction between “products” and “services.” More and more I’m coming to believe that all businesses are ultimately service businesses.
I wouldn’t think any less of you, or trust your advice any less if you recommended a list broker and told me that you get a small commission from any business you send them.
Still if it’s something you feel so strongly about, you shouldn’t do it. Because you’ll only hate yourself and feel you’re hurting your clients. Bad vibes!
Morty
June 16th, 2006 at 7:58 am
Yes Bob, I think you are missing the boat here … and maybe the dock too.
I see nothing wrong with a referral fee or a commission. What if someone sends you a gift card to thank you for your referral? Is that wrong too? I don’t think so.
We all run our businesses differently. I know you like to stay clear of anything other than the copywriting - and that’s fine. But for some people, referral fees and commissions may be a big part of what they do and how they make their living.
Disclosure is nice but not required. If I use my designer or printer for a client’s job, I often mark up their costs. Should I be disclosing my mark-up? I don’t think so. That’s my business. My clients are always free to use their own vendors.
I also don’t see why you make the distinction between products and services. It may be standard practice but that’s no justification. If you think it’s wrong to accept a referral fee for services, I think it should apply to products as well. These products typically offer advice which you are endorsing.
Bob, I realize that a referral fee is typically pretty small change in relation to your service fees - and understandably not important to you - but I wouldn’t be so quick to condemn those who do accept it or even those who seek it out.
Bob McCarthy
McCarthy & King Marketing, Inc.
Milford, MA
June 16th, 2006 at 11:41 am
Bob: I am not condemning you. It’s a personal choice. For me, it doesn’t work. The argument in favor of paying referral fees is that knowing where to go to get something done is valuable, and you deserve to be compensated for that knowledge. I view referrals as a free value-added to my clients, prospects, and others, helping both the person who needs a service as well as the vendor I am referring the business to.
June 16th, 2006 at 1:25 pm
Bob,
I don’t charge referral or finders fees. I recommend other professionals to my clients when they need them. I don’t expect anything in return.
I do, however, send people who refer me a small gift. For example, a woman I don’t even know (she gets my newsletter) referred me to her client, a major corporation. I will send her a Starbucks gift card and hand-written thank you note. I see nothing wrong with this. It’s not a policy I advertise, and truly, people appreciate a small token of appreciation.
Case in point: just last week I received a box of cookies from a colleague because I referred his services to another firm. I appreciated the gesture — it showed my colleague was grateful for my thinking of him, and it showed me that he knew how to generate future business.
Dianna Huff
June 16th, 2006 at 4:16 pm
DH: I do what you do when I get a referral: send a thank-you note and a small gift, typically either a box of chocolates or an autographed copy of one of my books. I ask others not to send me gifts, though if they ignore me and do it anyway, I accept graciously. A gift is NOT the same as a fee, as you indicate: one is a polite and courteous thank you, while the other is a bribe of sorts. In my corporate life decades ago, company policy allowed us to accept small gifts from vendors at Xmas time, but these gifts could not exceed $25 in value.
June 16th, 2006 at 7:22 pm
We recently sent a nice “thank you” check to someone who referred a piece of business but it was our decision to send the check. The person who referred the business didn’t ask for anything. It was however a nice piece of business so we wanted to send a tangible thanks.
June 19th, 2006 at 10:17 am
Bob, this is a great topic, and one that has been on my mind lately. I belong to a referral service where I have to pay a 15% commission for a defined period of time. I consider that arrangement to be like an employment agency and I get a lot of great clients from it, so I’m happy to pay the fee. With clients or colleagues who refer others to me, I usually offer a 15% referral fee. Some accept, some refuse. Some people expect one, some people are offended. When I give a referral to someone else, I have to feel comfortable sending business to that person, regardless if they offer me any financial compensation. I’ve thought about implementing a thank you gift and note as a standard policy. Many people prefer cold, hard cash though. I don’t think either are necessarily wrong. I can tell you that my thank you notes are posted 2 feet away from me on a bulletin board and stay with me longer than a $100 referral fee.
June 19th, 2006 at 4:00 pm
SG: I can see sending a check as a token of your appreciation, but not making the money a condition of giving or getting the referral.
June 19th, 2006 at 8:40 pm
[…] One of my Bloglines favorites is Bob Bly’s blog. Today I posted a comment to his post: “Is paying referral fees wrong?” . Basically, the question was whether being promised referral fees compromises a person’s integrity. If clients come to you for objective, unbiased advice and you are getting a kick-back from the vendor you refer to, how objective will you be? You can read my response here, but to expand on my answer on his blog, this is a topic that has been on my mind quite a bit. I’m still struggling to figure out the best course of action. I recently had a client that send a very good client my way. I thanked him profusely and offered him a finders fee for the first project. He accepted and I’m fine with that. However, that was not a condition of the referral. My CPA specializes in doing taxes for independent contractors and has saved me lots and lots of money for the past two years he’s been doing our taxes. I refer other people to him because he’s so good. He has a program that gives you a $25 discount off your taxes for each new client you bring to him. I guess the point here is you have to have the mindset that you’d give the referral even if you got nothing in return. Let’s face it, your reputation is way more important than a $25, $50, or even $100 check. I try to be flexible. Some people send me business and tell me upfront they’d like a referral fee. As long as it’s reasonable, that’s fine. Others refuse any offers of payment and just want their client to be happy. I have to admit that I respect that more. […]
June 23rd, 2006 at 4:00 pm
It’s a tough call. Up until recently I never considered entering into an arrangement where others would refer clients to me with the expectation of receiving a referral fee. I don’t refer to others just to get referral fees either. Most of the referrals I get are from people who are just serving their clients and that’s enough for them. Sometimes I will do something “extra” for one of my referrers as a Thank You but in each case I determine what Thank You looks like: it might be a credit toward future services (existing web clients love this), a gift certificate to Amazon, and once I took a colleague and her husband to dinner when they were visiting my area because she really had sent me quite a lot of business and I wasn’t able to reciprocate the same level of referrals.
On the other hand, I do think there are situations where, if both parties can set it up right, a cross-referral or a fee-based referral situation could work out very well for both, without there being ANY ethical dilemma… as long as you really sincerely believe the other person is offering a quality product or service that will be helpful to someone else. And let’s face it, if you can find the right referral partner and it helps you build your business, AND the clients are getting what they need, then who is being hurt by that?
So, while I don’t - and won’t - accept referrals from people who “expect” to be paid, I am open to coming up with some sort of “thank you” arrangement if someone takes the time to send me some business. I think it’s only polite, if nothing else.
July 5th, 2006 at 4:21 pm
Hi Bob
After 19 years in business, I insist on paying referral fees and getting paid. It works well for me and I truly believe that people appreciate what thy pay for and that ultimately in a Capitalist society we should be rewarded for the value we create. Every siuccessful Joint Venture I have been involved in has been based on a firm foundation of generous reciprocity. People lave a fortune on the table when they’re too weak witted or timid to demand compensation. When they realize that they justify their position. Pay and get paid, is what I say.
July 14th, 2006 at 5:05 am
Greetings from London, England!
I agree with Bob’s original post: how objective can one’s recommendations be if they’re ‘colored’ by the promise of a fee?
If you’re going to make vendor recommendations where you’ll get a fee for doing so, then the least you can do is make it clear at the time that you’ve got a financial stake in whose services (and products) you put forward.
I take no fees from any vendors I recommend — and make this clear to clients at all times. I’m sure that’s one reason why they value my input, and why I get so much word-of-mouth business.
Chris Gregory
July 22nd, 2006 at 3:54 am
The ideas here are certainly helpful.
I have just started a new software development company ( again
) in the Philippines. We do have people who come to us and are excited to refer us some potential clients. In the past, I did give referral fees as a way of saying thank you.
July 29th, 2007 at 10:53 pm
The best way to say “Thank you” is with a check.
November 18th, 2007 at 7:34 am
7 brand new PSP titles have also been announced and they’ll be made available via the new network.
These downloadable games include three action titles, two musical titles, a racing title and a shooter, suiting every gamer’s tastes. If you own a PSP, you’ll be able to access the new content with the aid of a Wi-Fi connection or through your PC connected via USB. Keep in mind that the new titles will be shorter than the usual UMD games, but we’ve seen blockbusters ranking high in game reviews, although they only took up 200MB of storage space.
US gamers might get a surprise for Christmas, as the PC compatible version of the PSN will become active this winter. Care to guess what those 7 titles are? I’m hoping for Kingdom Hearts: Birth by Sleep demo, or a brand new Ridge Racer, although I won’t be surprised to see NFS ProStreet surfacing on the PSP this winter. Sony’s finally doing something to catch up with the Xbox Live and the Wii’s similar service, but as long as there’s no daily update and the lag’s omnipresent, the PSN will still be number 2… or even 3.
Source
December 18th, 2007 at 11:34 pm
Bob,
I just happened upon this while trying to search for info about referral fees. My husband and I own a very small custom cabinet shop and have recently agreed to accept referrals for residential work from another cabinet shop in town that only does commercial work. At first we were just happy to get the work, however it is now wearing on us and we are debating tonight about whether we will continue. Some of the problems with this set up are the following: 1) Price increases to customer as the fee must be addeded into the job. 2) The company referring our company is only doing it for the money, they don’t care who they refer if they will pay. 3)Generally the referral is just a person calling in from the phone book and they happen to be in the #1 position.
We actually refer other trades that we know do exceptional work and would never ask nor take a referral fee from them. This is our way of taking care of our customer base.
So in short I agree with Bob, however when you are trying to make it in business a referral sure helps pay the bills…even if there is a fee.
Tina
October 30th, 2008 at 12:53 am
Do you have to be licensed at all to get a referral fee? How about an agreement between friends? Fee is so minimal and just for a short time.
November 14th, 2008 at 4:31 pm
It’s been explained to me by a former FBI agent that the difference between a kickback (illegal) and a referral fee is that the referral fee is disclosed to the idividual who is ultimately going to pay the bill. ie; if a homebuilder pays a referral fee to a real estate to be recommended to the homebuyer to build a house then that fee should be dislosed to the homebuyer or it is a kickback.