Paying Referral Fees to Individuals: How Much And How Do They Work?

A constant flow of new customers is one of those things that a business needs to be profitable. And while the usual routes are to place ads or use social media to reach new audiences, more and more companies are turning to their existing customer pool by paying referral fees to individuals.

These referral programs tap into a brand's customer base and make them into brand ambassadors who will tell their friends and family about the products they love. Many businesses offer a referral fee (aka cold hard cash) for their effort. 

What To Know About Referral Fees And Commissions

What do you do when you need to buy something but are on the fence about where to make a purchase? You turn to the internet to look up online reviews and ask friends for their opinion or recommendations. Recommendations given by friends and family are invaluable since they have firsthand experience with the product and you can trust that it will be a good buy. 

These referrers are customers who provide that crucial connection to new customers you otherwise would not have been able to access. To sweeten the deal for these brand advocates, offering a referral fee or a commission will reward them and encourage them to continue introducing new customers to your brand. It is another way to ensure a steady stream of new customers while keeping current customers happy. 

Launching a referral program isn't a silver bullet to achieving growth and record sales. Instead, it should be used in conjunction with a marketing plan. Historically, most marketing campaigns focused on traditional print and TV advertising, but now companies realize the worth of word-of-mouth (WOM) advertising. Though in the beginning, companies needed help to measure the effectiveness of WOM. But now, with referral programs like Friendbuy, launching and tracking a referral program is much easier, and many organizations, even small businesses, are turning to WOM referral marketing and establishing referral programs. 

And one of the best ways to ensure the success of a referral program is to give rewards, referral fees, or commissions to loyal customers who act as your brand ambassadors.

What are referral fees?

A referral fee is a type of commission paid to a person who brings new clients to a business. It is sometimes called a finder's fee and is used in many industries, like insurance, real estate, and retail. The fees, typically in cash, could be anywhere from 5% to 25% of the total sale, depending on the type of transaction. The referral fee motivates the referrer to recommend the business, bring in new customers, and facilitate sales. 

In the Friendbuy system, you can think of referral rewards, like the Advocate Reward, as the referral fee. The Advocate receives a gift card, discount, swag, etc., in exchange for successful referrals. A cash reward isn't an option for referrals in Friendbuy. 

And since we recommend that both the Advocate and Friend receive a reward, the combined cost of the Advocate reward and the Friend incentive is part of the cost of the referral fee. The Advocate reward and Friend incentive are tied to a successful conversion, such as a product purchase or subscription sign-up, so the cost of the referral program pays for itself. 

In the Friendbuy referral program dashboard, you can quickly start a referral program, choose rewards, and monitor progress. It is easy to operationalize referral fees through a referral program powered by Friendbuy. Through the program, you can also set scalable business rules, fraud detection, and A/B testing to see what referral fees work best for your business. 

Benefits of referral fees

Instead of hoping to reach customers through digital ads, email newsletters, or social media posts, referral programs take out the part of leaving it to chance that new customers will find out about your brand. Instead, referral programs and the referral fees that loyal customers can receive make it easier to reach potential customers. And it isn't just a shot in the dark because the referral is done by someone they know; the potential customer comes in trusting the brand and is more likely to convert into a customer. 

In fact, WOM drives 20% to 50% of purchasing decisions. It has the most effect when customers decide to make a first purchase for an expensive product. Typically this makes people do more research before shelling out the cash, so customers ask for friends' opinions and take their time to think about their purchase.

In a nutshell, these are the benefits of offering referral fees:

• Low cost. It is cheaper to run a referral program and give out referral fees than traditional marketing plans.
• Generate quality leads. Since Advocates recommended their family and friends, the new customers already trust the brand and will likely make a purchase.
• Increase brand awareness. The Advocate is promoting the product to their network so the brand is introduced to a new audience that you otherwise would not have been able to reach. 
• Encourage customer loyalty. The chance of receiving a gift or reward in exchange for a referral builds goodwill with existing customers and makes them repeat customers too. 

How to know if your business could benefit from referral fees

The long and short of it is that any business with a referral program can benefit from offering referral fees. But that doesn't mean that it is a one size fits all kind of deal. There are things to consider before offering a referral fee - do you already provide a commission to your sales team, will offering a referral fee lower your ROI, or if you are in a regulated industry, is it legal for your business to offer referral fees, etc.? And launching a referral program and offering referral fees make sense if you have customers who love your brand enough to promote it. Then offering a referral fee or reward will give them that extra push to join your referral program. 

If it makes sense for your business to offer a referral fee or a referral reward, then you could choose one of the following for the referral payout:

• Referrers receive a flat fee for every referral. Typical industries that use this type of fee structure are dealerships, jewelry stores, or companies selling big-ticket items. It is a set cash fee that is paid out regardless of how much or how little work is done. 
• Percentage structure. Multiple referral fee percentages can be set for the amount of work done by a referrer who receives cash. For instance, if a referrer gives a lead, they receive a 10% referral fee, or if they bring a lead and close a deal, they get a 40% referral fee. This type of fee structure can work for a software business, real estate, and contractors. Remember that the bigger the project, the lower the referral fee percentage.
• Referrers receive a reward for every referral. This can work for retail, insurance, or subscription services. Since it is a one-sided reward, only the referrer gets a reward like gift cards, products, or swag. Friendbuy's customers use this referral fee structure and often offer two-sided rewards, too, so both the Friend and Advocate are encouraged to participate in the referral program.

Things To Consider For Your Referral Offer Strategy

When you start thinking about your referral program, deciding the referral fee or reward will be an essential part of the process. On the Friendbuy dashboard, you will have to choose what kind of referral offer type to use, such as:

• Coupon code: For accounts not using Shopify that would like to distribute coupon codes, they need to choose this option. The coupon codes will be created and distributed from a code bank within your Friendbuy account. You will also have to select a Code Bank from the dropdown; if there isn't any, you will need to create one. Read our help article about how to create a code bank. 
• Account credit: If you use Shopify Plus, you can issue Account Credits to Advocates. Please contact Support or your Customer Success Manager for assistance with the implementation of this.
• Gift card: Gift cards are distributed from a code bank within Friendbuy. 
• Tremendous Gift Cards: Gift cards, prepaid cards, or cash rewards can also come from Tremendous. This is only available for merchants that have set up the integration within Friendbuy and their Tremendous account. You will have to choose a Code Bank from the dropdown; if there isn't any, you will need to create one.
• Shopify coupons: For merchants using Shopify, the coupon will be automatically generated once the referral conversion event is done. You will have to choose a percentage discount or a currency amount (along with the type of currency). Optionally, your Shopify store can add a minimum purchase amount and new customer eligibility restrictions for redeeming the coupon. Each coupon is one-time use, suitable for all products, unique, and does not expire. This option is only available for merchants with a Shopify account integration within Friendbuy.
• Other: Select this if you want a custom flow for the Advocate Reward distribution, e.g., managing account credit in your own system or providing a swag item. 

We recommend offering two-sided rewards, so the interaction doesn't feel transactional since both the referrer and the potential customer receive something. But, there are instances when a one-sided reward is the only option because of state and national laws. Aside from one-sided and two-sided rewards, you could also use tiered rewards to level up the referral fee payout. "Super" advocates will receive even more rewards for all of their hard work in referring new customers. You can quickly identify these advocates by downloading the Top Advocates Report of your referral campaign. Use the data from the report to personalize and adapt a referral program to those advocates, giving a campaign even more of a chance to succeed.

Let's take a look at the other factors you should keep track of to ensure your referral program is on track to be successful and increase your ROI.  

Cost Per Acquisition

The bottom line is that you are in business to make money and a referral program should increase your ROI. It is vital to figure out how much you are currently spending on each sale and how much you are willing to offer for your referral program's Advocate reward and Friend incentive. 

The Cost Per Acquisition (CPA) is how much it costs for a customer to make a purchase. It starts at the top of the sales funnel, from the first touch point to customer conversion and purchase. A simple way to calculate the CPA is to divide your campaign budget by the number of customers attained by the campaign.   

CPA = Campaign Cost / Number of Conversions

It is one way to measure how well a campaign is going since it helps estimate how much new customers cost. If the CPA cost is high, you may need to reconfigure the referral campaign to get more customers and increase those conversion numbers. 

Repeat Purchase Rate

Getting customers to come back to make another purchase is one of the challenges for e-commerce companies since thousands of brands are battling for customers' attention and loyalty. Luckily, it is way easier to have a customer make a repeat purchase than to convince a new customer to try your product. It is cheaper to boot too! 

Sometimes the repeat purchase rate may be low because of the type of product you sell. For big-ticket items like mattresses or cars, these products aren't purchased yearly, yet alone monthly. Friendbuy's clients that fall into that category often turn to give out third-party gift cards for successful referrals since that makes more sense than giving out a bed or couch for every referral. 

On the other hand, for products that are often purchased, like groceries or clothing, store credit is a good option for a referral fee. Advocates receive store credit in the form of percentage discounts or coupons that they can use on their next purchase. So, aside from gaining a new customer and making a sale, the referral program also encourages the current customer to make a repeat purchase. 

The repeat purchase rate calculates the number of repeat customers to the overall customer base to determine the percentage of repeat customers. Repeat customers fall into the category of those who have made two or more purchases. You can use this formula to calculate the repeat purchase rate:

Repeat purchase rate=

(Number of customers with two or more purchases/Number of customers ) x 100

Getting 20% to 30% of your customers to come back and make another purchase is considered an acceptable rate. A low rate is an indicator that you need to work to improve the repeat purchase rate. Some of the ways to increase the repeat purchase rate are to have a smooth and rewarding customer experience, excellent post-sales service to increase customer loyalty,  and continuous customer communication to keep your brand top-of-mind with your customers. These efforts help ensure that your customers come back to you when it is time for them to make another purchase.

What other offers you have on site

The beauty of running a referral program with Friendbuy is that you can have multiple campaigns running simultaneously. But the trick is to make the referral programs slightly different and tailor them to the right audience. You can have a standard, entry-level campaign that offers 10% off, then a referral contest for a limited time that is tied to a holiday, or tiered rewards for your "super" Advocates.

There are many possibilities, but it is best to look at any data you have collected from your customers or make educated guesses about what your customers may want. A referral program will benefit from giving out referral fees, and with Friendbuy, you can easily determine if that should be a one-sided reward for Advocates or two-sided rewards for Advocates and Friends. 

Referral tracking

Once you have launched a referral program and are in the thick of it, the data will start flowing in and you can see how many customers are engaged and participating in the referral program, if you need to tweak the campaign, or if you are on the right path.

Referral tracking is the process of monitoring every stage of a referral program. It keeps a tab on everything from when an Advocate's referral link is first registered to the purchase their Friend makes and everything in between. Friendbuy's tracking mostly centers on the Advocate's referral code and whether triggers have been met. It helps validate referrals and prevent fraud, which keeps everything kosher and ensures only legitimate referrals are paid out. 

Depending on the type of businesses, there are different options to track a referral program:

• Referral marketing software. These types of software or apps are available online, like Friendbuy! The software is a one-stop shop for launching, monitoring, and maintaining a referral campaign. Any business with a referral program can benefit from using the software since it makes it easy to run a referral program. Once the campaign has started, the software will automatically track every step of the process so you can focus on other parts of the referral campaign.
• Spreadsheets. A manual way to keep track of a referral program is to use spreadsheets like Microsoft Excel or Google Sheets. Your company will have to type in all the information and track the data yourself, so the person in charge of the tracking must be on top of things. This can work for small businesses that have a new referral campaign. Big companies with thousands of customers may find themselves overwhelmed quickly with all the information to keep track of and all the data to input. Get our free referral tracking template.
• Forms and questionnaires. This is an upgrade from using spreadsheets. Customers will fill out an online form that populates into a spreadsheet. You would then need to make a unique referral code for each referral. Then you can use other online apps to help track the referral program process.

A referral tracking system will show you which Advocates need to be rewarded, how many successful conversions occurred, and other important information you may need to monitor a referral campaign. 

Referral Fee Examples

The two main types of referral fees are the flat fee and the percentage fee. The flat fee is the amount that a referrer receives for every successful referral they make, regardless of how much work was done. While with the percentage fee, the referrer gets a percentage of the revenue or sticker price of the product.

In Friendbuy's system, the referral fee is a flat fee, and it comes in the form of the Advocate reward and the Friend incentive. On your campaign dashboard, you can set the type of reward or incentive for a particular referral program. These are the types of rewards and incentives that our customers have given out in their referral programs: 

Percentage structure

Bonobos, a men's fashion line, gave the Advocate and Friend a 25% discount code for successful conversions.

• Friendbuy customer: Bonobos
• Referral fee type: discount code
• Advocate reward: 25% off when their Friend makes a purchase
• Friend incentive: 25% off their first purchase
• Referral trigger: Friend needs to make a purchase

Gift card 

Smile Direct Club, a teledental company, ran a referral campaign to celebrate its fifth anniversary by giving an Advocate a $100 Amazon gift card and a special gift when their Friend purchased aligners. The Friend also received $100 off their aligners.

• Friendbuy customer: Smile Direct Club, a teledental company
• Referral fee type: gift card and discount code
• Advocate reward: $100 Amazon gift card
• Friend incentive: $100 discount code
• Referral trigger: Friend purchases aligners

Products or services 

Homer, a learning app for kids, had a referral campaign where Advocates received a $10 Amazon gift card when their Friend signed up for a subscription. The Friend received a one-month free trial.

• Friendbuy customer: Homer, a learning app for kids
• Referral fee type: subscription and gift card 
• Advocate reward: $10 Amazon gift card 
• Friend incentive: Free one-month trial
• Referral trigger: Friend signs up for Homer

Tiered rewards

Axios Local, a news website, offered a tiered rewards program to Advocates. The more Friends signed up, the more swag the Advocate received. 

• Friendbuy customer: Axios Local
• Referral fee type: tiered rewards
• Advocate reward: Axois swag
• Friend incentive: none, one-sided reward
• Referral trigger: Friend subscribes to Axios 

Free product 

Olive & June, a cosmetic brand, offered free nail polish for every successful Friend conversion. The Friend received 20% off their first purchase. 

• Friendbuy customer: Olive & June, a cosmetic brand
• Referral fee type: free product and discount coupon
• Advocate reward: free nail polish
• Friend incentive: 20% off their first purchase
• Referral trigger: Friend makes a purchase 

Dollar discount

Outdoor Voices, an activewear company, gave both the Advocate and Friend a $20 discount. 

• Friendbuy customer: Outdoor Voices, an activewear company 
• Referral fee type: dollar discount
• Advocate reward: $20 off their next purchase of $100 or more
• Friend incentive: $20 off their next purchase of $100 or more
• Referral trigger: Friend makes a purchase

Closing Thoughts

A referral fee may be what your referral program needs to go from so-so to extraordinary. After all, customers like to receive free stuff and discounts. And they probably talk about your products that they love. So, the chance of getting something in exchange for a referral isn't a hard sell!

You can quickly scale a referral fee program within a new or even an existing referral program powered by Friendbuy. You can also track and tweak a referral program to see what referral fees work best for your business. If you're interested in taking your referral program to the next level with referral fees, the experts at Friendbuy can help.