SPECIAL REPORT: Should You Offer a REWARD to Those that Refer You?
April 13, 2010
THE REFERRAL REWARD SYSTEM
To maximize your referrals, you should definitely offer a financial reward. You will get more referrals and your advertising dollars will go down. Sure you can get referrals without a reward, but you will get much more if you if you offer a reward. Plus, offering a referral reward gives you something to talk about. If you don’t offer a reward of some kind, you cannot aggressively ask for referrals without turning people off. Why should they refer you? What’s in it for them? By offering a reward, you can constantly motivate them by promoting “free cash or service”.
Is everyone motivated by money? No. Can everyone accept a reward? No. At the time of this writing I have spent almost 20 years developing and testing my referral reward system and have overcome many of these obstacles. You may have thought about different ways to reward those that refer you. You may have even tried different reward techniques. It is important to have the right type of reward system. There are many that do not work. I developed a simple, but phenomenally successful reward system. Try to use this as close as you can. Obviously depending on what type of business you have, you may need to modify it. I will try to give you some tips on modifying it without losing the potency. The danger in changing something that is proven is that one small change could prevent it from working at all. Learn my system and then we will discuss possible changes.
Here’s how it works…
A 10% referral fee is offered to anyone that refers a new client to our company. This is for new clients only. After they have used us once they become a repeat client. A Referral Reward Certificate is issued and it is redeemable for CASH or FREE SERVICE in the amount of the certificate. The certificate is valid for one year. The expiration is to promote repeat business during the year and to eliminate having an endless number of referral certificates floating around in the marketplace.
Here’s an example… Let’s say that Bob Jones refers Sue Smith to my company. Sue Smith spends $500.00. A referral certificate in the amount of $50.00 is sent to Bob Jones. Bob Jones may then elect to redeem the certificate for cash by returning it to our office. At that point a check will be printed for $50.00 and sent to Bob. If Bob prefers, he can hold onto that certificate and present it for service. He will get $50.00 worth of service regardless of the amount of his bill. If his bill is $100.00, we will take $50.00 off. It’s that simple. Over the last 20 years I have tried other methods of rewards. This method is the simplest to implement and overcomes many problems that other reward methods present. The following question and answers reveal why this method is best.
Questions and Answers
a) Why 10%, not $10.00? If someone refers a $2000.00 job to me, will $200.00 or $10.00 have more impact on them? If they have one $2000.00 client, chances are they have more. I want their attention! If I were to offer a 15% discount on their next service (another popular but totally ineffective means of rewarding), and the new client spent only $100.00 with me, but the referring party had a $1000.00 cleaning bill. The next time the first party cleaned, I may be offering $150.00 for a $100.00 job. Not good math.
b) Why cash? Why not just limit the reward to service or product? Because there are many referral sources that are in a prime position to send you many, many valuable clients, but, have no interest in your service or product. Or they could not possibly use as much product or service that they can generate through referrals. Case in point: A carpet salesperson that has a prime opportunity to refer a carpet cleaner practically every day lives in a rented house. Plus, he could not possibly use that much cleaning. What he is interested in is cash. Gas money. Dinner money. Golf betting money. Whatever. Money talks.
c) Why use a certificate? Why not use cash or a check? There are some referral sources that have a conflict of interest and they cannot accept a referral reward (insurance agents, some Realtors technically can’t), or they somehow feel uncomfortable accepting a reward. If you send cash, you have put them in an uncomfortable position. The certificate is completely transferable and may be passed on their client or anyone else of their choosing. Another reason you don’t want to use cash is because it diminishes your returns, which will be revealed in the next point. The reason you don’t want to automatically send a check is because of reasons just discussed, many of those checks will never be cashed, creating a bookkeeping nightmare for you. Our experience is that less than 50% of the certificates will be cashed even though the referral source appreciates the acknowledgement. This brings me to the next point…
d) How can I get a 20 to 1 return? If you offer a 10% referral fee, and only half the certificates are redeemed, that gives you a 20 to 1 return. Not bad considering that the best campaigns in traditional advertising most often times don’t even produce a 4 to one return! Even if you offered 20% and every single one was redeemed, you would have a 5 to 1, guaranteed return! Of course you could choose not to pay a referral fee at all, but my experience has proven that would be unwise.
e) Is a referral fee legal? What is the difference between a “kick back” and a referral fee? A “kick back” is illegal. This is when you reward an employee or someone that has an “interest” in the company that does the work. Example, let’s say that an employee at a commercial account that you call on is instrumental in getting the contract secured for you. You cannot reward this personal financially! That’s illegal.
f) Do I need to issue a 1099?. If an individual redeems more than $599.00 in a calendar year, you must issue a 1099. Check with your CPA and attorney to get advice of how they want to handle this situation.
g) Multiple Referrals – What do you do if more than one person referred you? You can either issue all referring parties a certificate or you may elect to reward the first party that referred the new client. Let’s say there are two if your redeem rate is 50%, you still have a 10 to 1 return. If they both redeem, you still have a 5 to 1 return.
h) What if they can’t accept a fee? If your referral source is in a position where they have a conflict of interest, let them know that the referral certificates are sent automatically and they can choose whether they would like to pass it on to their client, give it to someone else, or simply discard it.
i) What if they say “I referred you, but never got anything?” You may print your referral certificates on duplicate and keep a file, and/or simply refer back to where you notated the referring party (covered in the tracking section), and cross reference your check register to insure that it hasn’t already been redeemed. Then, by all means honor it, even if it has expired. The whole purpose of the reward program is to encourage referrals, not to find a way not to pay!
j) How do people redeem the certificates? They either mail it back to you indicating they would like cash (a check), or they present it for products or services.
k) Do I pay the individual or the company they work for? I have found that if you wait to get “approval” from the manager or owner to get referrals, you may be waiting a long time. In many cases, an employee has direct contact with clients and is in a perfect place to refer you. The manager or owner is covered in paperwork and problems and doesn’t have time to think about it. So, my suggestion is to reward the individual. If the company decides that they want you to pay it to the company, then pay it to the company. Encourage them to let the employees have it or at least share it. If they won’t, I would go as far as matching the referral fee myself. Even if you pay 20%, that is still a 5 to 1 return on your dollars. If statistics hold true and only 50% are redeemed, that is a 10 to 1 return. Remember this is only on new clients that were referred. In the big picture, you will have repeat business and possibly new business from advertising. The referral fees my company pays out total 1% of our sales. Not bad.
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