Should referral fees be part of your sales strategy?
I’ve maintained, throughout my career, that when selling is done right, it’s one of the most purely beneficial and enjoyable ways to make a living that there is. And then, there are times that I’m disappointed in the ethics of my profession. Such an instance happened a couple of weeks ago, and it centered around a referral.
A small business consultant whom I have known for some time called me and said, “Hey, Troy, I have a referral for you. A client of mine really needs some sales consulting help, and I feel like you’re the right guy for it.” I thought that sounded good, and we talked. The more we talked, the better it sounded – until the other shoe dropped. Within that shoe was a misunderstanding of what referrals really are and what they should be.
The consultant, after we had discussed it for awhile, said, “By the way, I’ll need a referral fee on this one.” I should point out that I’ve referred him a few pieces of business over the years, and never asked for a fee. I don’t do that. It’s against my ethics. However, I asked him how much he’d need, and when we figured out what the project would be worth, his fee (had I chosen to pay it) would have been slightly more than $1,000.
I explained to him that I neither pay, nor accept, referral fees, because I think they introduce an ethical issue into the transaction. Over the years, I’ve paid referral fees five times (the last was about six years ago), and every time, the deal has gone sour due to ethical or communication issues on the part of the referrer. I also reminded him that he had done business from my referrals – which I never charged him for. He still responded that he was pretty committed to needing the referral fee.
I asked him if, should I not pay the fee, he was going to find someone else who would pay it? He hesitated and then indicated that he would do so. “Even though,” I asked him, “you have told me that you feel like I am uniquely qualified to solve your customer’s problems? Is $1,000 that meaningful to you?” He grew quiet, and then said that his ‘new business model’ required these fees. I thanked him for the thought, but told him that if the business could be bought by anyone for $1,000, that I didn’t want it. I asked him one final question, which I’ll get to in a moment.
What’s disappointing to me isn’t the fact that I won’t get the business; I’m doing well. Nor is it the fact that I’ve referred him business for “free” in the past. I might do so again. He’s good at what he does. What’s so disappointing to me is that he’s willing to sell out his ethics at all, never mind for such a small amount. You see, a referral to me involves certain ethical guidelines. Let’s look at that.
When you refer another service provider to your customer, here is what you are saying: “I know you have a need that needs to be solved, and I can’t solve it. However, I care about your well-being, and based upon my experience, I know someone who can solve your needs – and I stake my credibility upon their work.”
Wow. That’s a heavy statement, isn’t it? Notice that, nowhere in there did it say “and I’m getting paid for solving this problem.” In fact, the other question I asked the consultant was, “Does your customer know that your referral depends on who pays you?” He got very, very quiet when I asked this question. The truth, I suspect, is that if the customer knew, it would greatly damage his relationship.
When a true referral is made, here is how the three parties involved perceive the referral:
Referral provider: “I’m doing a good thing here, because I’m solving a problem for a customer (and hopefully deepening my relationship because of it), as well as helping a friend or trusted associate to grow their business. Hopefully, I’ll get a referral back.”
Referral recipient: “This is great! I’m getting a new customer, and the person who is giving me a referral is showing a lot ofconfidence in me. I need to see if I can generate a referral back for them, to help them as they have helped me.”
Customer: “Boy, that saved me a lot of trouble! This salesperson (or associate) whom I trust and respect is introducing me to someone he trusts and respects; I should value this new person’s work and input highly.”
Now, here’s how the parties involved perceive the transaction when a fee is involved:
Provider: “Well, I can get some cash out of this, which I wouldn’t have if the customer found his/her own solution.”
Recipient: “I can buy this piece of business.”
Customer: “Boy, that saved me a lot of trouble! This salesperson (or associate) whom I trust and respect is introducing me to someone he trusts and respects; I should value this new person’s work and input highly.”
Did you notice that the customer’s perspective didn’t change? That’s because nobody told the customer that it wasn’t a true referral. Hence, the customer doesn’t know that it’s a cash transaction instead of an expression of trust. In many cases, if the customer did know, it would greatly affect the success of the transaction – or even kill it. In fact, if the customer does learn that a fee was paid for the referral, his trust in both parties tends to drop significantly.
When people want a ‘piece of my action’ for introducing me, my first thought is to wonder how much business that person is actually doing on their own; my experience has shown me that the value of a referral fee pales in comparison to the value of a reciprocal referral. However, people who charge for referrals seldom receive referrals of their own, and the reason is simple: Once the fee is paid, the obligation from one party to the other has been completed.
In many professions, referral fees are illegal, precisely because of the conflict of interest inherent in the process. Even in professions where they are not illegal, I would strongly recommend not charging them nor accepting them. A good rule of thumb is this: If you couldn’t proudly relate the details of the referral to your customer, maybe you shouldn’t do it.
In this case, I lost the business, but kept my ethics and dignity. You might occasionally lose business, too, by staying “fee free” with respect to referrals – but isn’t your integrity worth more?
