We all want to have a continuous flow of customers and clients coming into our businesses but are sometimes unsure of how to do it. how can we ensure there’s a constant flow? A finder’s fee or referral commission can help establish a network of people that refer your business.
Print advertising seems to have gone the way of cave drawings, and digital messages can be fleeting. People don’t have long attention spans, and conversion rates for things like pay-per-click (PPC) ads are at all-time lows. Company advertising is expensive, and it doesn’t capitalize on existing brand advocates. That’s why many small businesses offer finder’s fees.
But what’s a finder’s fee, and how can you use them to generate more sales? This blog will show you how.
What is a finder’s fee?
So what exactly is a finders fee (sometimes referred to as referral fee)? A finder’s fee (AKA referral fee) is a type of commission paid to the coordinator in a transaction. Sometimes it’s for just the business introduction but more often it is tied directly to a sale.
So how does a finder’s fee work?
The excitement about the products and services you offer will ultimately determine if the finder’s fee will work. To ensure this fee works, you have to make sure there’s a buzz around the products you offer. You can then and go ahead and give incentives on top of that to ensure the information about your business is well spread.
Finder’s fee example
Say you’re looking for an apartment– you’re willing to pay a realtor fee so they can set up appointments for you or find a place that hasn’t been listed on the market yet. In some markets, it’s almost impossible to get a decent apartment without finder fees. With a type of fee, you pay someone for their experience and contacts.
As a business, you can offer payment to brand advocates who are able to bring in new business. It’s sort of like a referral agreement, but these people are exceptionally good salespeople, drumming up a new business that you wouldn’t have otherwise. At some point, these brand advocates should be rewarded, and you should consider offering them finder’s fee money.
Who should use finder’s fees?
All sorts of businesses can use finder’s fees to gain access to client networks that are tough to tap into. If someone has a whole network of people that would be perfect customers, it makes sense to enlist them as a salesperson, and pay them a percentage of the finder fees. Other terms for these customers are ambassadors, advocates, and influencers.
Who pays for a finder’s fee?
Usually, the person who initiates the process pays the fee. In most practices, the seller doing the advertisements to their goods and services begins the process of picking a ‘finder’ to search for a ‘buyer’. Or you can use third party services, depending on your industry. Example of third party services are head hunters who might get paid by the recruiter and get a percentage from the newly hired employee.
With the finders fee explained at this stage, all the involved parties conduct the business knowing what everyone wants.
What percentage is a finder’s fee?
We can not say that standard referral fee percentages exists. However, when you set out to work the percentage for a finder fee, there are quite a number of issues to look into before you can settle on the fee.
Determining finder’s fee percentages?
There a no standard referral fee percentages. When figuring out a referral / finders fee percentage, there are multiple things to consider:
Servicing the deal and cost of goods sold
Am I already compensating my own salespeople on a commission basis? If so, is the referring party a replacement for them or do they just send the lead to the salesperson? Is there a service/consultative component of the sale? Is this a white label type of deal where I am the service provider? Are their material costs for the service? What does it cost you to perform this service? What is your profit margin on making a sale? What about costs of marketing or ads? Referral commissions are complicated!
If there is a substantial cost of doing business for the sale, the percentage should be lower. Also be weary of giving a commission comp to both the finder and your sales team.
Length of the sale process
Some sales processes take a long time to close. How long does it count as a sale for the referring party? Within 1 month, 6 months, any purchase? How long should you consider this lead/sale as coming from the referring party?
It has to be fair so you aren’t handcuffed to this deal forever. Understanding and being clear on when the relationship transitions from the finder to the business is important.
When and how do you get paid?
How are funds received for the sale? Up front? Installments? Is this a recurring service? What about refunds or money back guarantees.
When cash is received helps plan out the payment schedule. Just be sure you are making money in all cases.
All of these factors help you determine how much to compensate when to compensate, and for how long. You want to be fair to all parties so it makes sense. After all, we all want our fair share. Important to look at both sides of the table! Once a proper structure is put in place, everyone can win!
How much should I pay for referral?
As we mentioned above, there are many variables that weigh into calculating the ideal finder’s fee. There’s never a fixed amount to pay for this.
Normally it varies and what’s paid is subject to negotiation and agreement. You can also promote it as open to negotiation so you can find the market value of your finder’s fee.
Also keep in mind it does NOT have to be a percentage. A flat fee often works well, especially if margins are thin and you may have to pay a salesperson as well.
Examples of finder’s and referral fee percentages
For example if a project is worth $50k in USD revenue, a reasonable amount to pay should be 5 to 10% of the first project, or of all the projects initiated by customer in the first year or two. If the fee is too high, the customer will find somebody cheaper. You must therefore be considerate with your prices and ensure the finders fee explained is adhered to.
Here are some examples:
Automotive sales are a good example of the use of a finder’s fee (often called bird-dogging sales by car dealerships). First you have a large purchase price and a lower frequency of sales. You also often have a sales person involved at the dealership. Margins are typically thin, and often times even compensated by the manufacturer. None the less, having people out on the streets in locations like a car repair shop or body shop is a great way to generate quality leads. With all the factors to consider, most finder’s fees for an automotive sales are bound to a sale and are a flat fee in the amount of $100-$300.
A nice example of software referral or affiliate fees is outlined below. Credit to Jason Lemkin on his breakout of these fees.
- 35%-40% of first year ACV (Annual Contract Value) if they bring you a closed, signed lead. It would cost you that much to acquire and close that lead yourself.
- 15%-20% of first year ACV if they bring you a true Opportunity. I.e., if they do the marketing part, but not the sales part.
- 10% or so for a Lead. Much more than this, without deep qualification of the Lead, gets expensive.
Consultants and Services
Flat fees with a combination of percentage based fees based are often done with consultants and services. There is not typical finders fee for consultants as it varies very much with types of contracts and services. We’ve seen a bottom fixed amount to make it worth the person’s while while also capping the top end.
Other ideas on fee schedules and arrangements
Depending on how you want to drive your finders/referrers they can largely be viewed as a sales force and there are many different ways to incentive a sales force. Here are some that can also work for finders:
- Higher amounts for the first referral (helps to get one started as a referrer)
- Increasing amounts based on number of referrals (often bounded in a fixed timer period, i.e. month)
- Contests where you reward the high performers (often bounded in a fixed timer period, i.e. month)
Are these referral fees legal?
Highly regulated industries often have state or national laws or license rules that do not permit finder’s and referral fees. Legal professionals, real estate, financial services, and automotive industries are the ones to be the most careful with. Check with your own state and or organization to be sure.
You should also be aware of tax implications of these fees for business. The amount of fees paid to an individual in excess of $600 in a calendar year are subject to taxes by the recipient. It’s your responsibility to collect a W-9 form and issue a 1099 when you are paying more than $600 in a calendar year.
Another consideration for the tax element is that if it’s a previous customer who is referring you business (like a customer or refer a friend program) the amount you pay to the referrer can be considered a “refund or a discount”. Very much like one of those “manufacturer mail in rebates”.
What is a finder’s fee agreement?
Call it a referral agreement or finder’s fee agreement. This is a formal agreement binding the finder and the business owner, and in which, the formal agreement is outlined.
What is in a finder’s fee agreement?
It’s up to you whether you want to outline a formal agreement or not. There are many templates out there but most of them include the following sections:
- Role of the finder
- What is considered a accepted referral – Most are tied to a sale, but will you accept one retroactively? Where a referrer tells you after the fact?
- Compensation / Referral / finder’s fee – Many ways to calculate the fees. (see our other sections above)
- Payment conditions / Fee schedules – When and how you’ll pay. Don’t forget to consider returns/refunds policies.
The agreement involves your money, so it is worth the time up front to come up with an agreement especially since the money involved can be high.
Why use a finder’s fee?
A finder’s fee encourages intermediaries to go above and beyond to spread the message about a business and reward them for a job well done.
These programs foster a sense of community and involvement with employees and keep clients excited about your business. A Finder’s fee also saves you time by tasking others with tracking down new prospects utilizing their locations and relationships.
Perhaps the greatest benefit of enacting finder’s fees is that you have nothing to lose. Customarily, you only pay the middleman if she generates new clients. That’s a far cry from the risky investment of an expensively paid company advertisement that could go unnoticed for the duration of the campaign.
When your ‘finders’ hunt down new business, you’ll find new business that you may have not had access to previously. It’s a great allocation of resources to have an expert do the heavy lifting and leave you to do your regular tasks. Finally, finder’s fees motivate intermediaries more than the prospect of just doing a favor. Who wouldn’t want a reward for helping someone out?
How to ensure finder’s fees work
A finder’s fee won’t work if people aren’t excited about the products and services you offer. A traditional finder’s fee incentivizes someone to share information with their network. But why would they share this information if they didn’t believe in it? As mentioned by Carol Roth a contributor to Entrepreneur, “not every lead is worthy of a finder’s fee“. So if there isn’t a good standing relationship with the lead, it may not be worth asking for a fee.
Remember, not only should you provide quality products and services, but you also need to give adequate compensation to those who are willing to find customers on your behalf. Also, remember to not share confidential information (this could bite you).
Have other finders fee agreement tips besides the ones commented on above? Feel free to share them with us!