Business Referral Agreement

What is a Referral Agreement?

A Business Referral Agreement is a contract that outlines how a business that refers work to another business or individual will be paid.

It makes good business sense to reward people or businesses for referring work to another business using a Business Referral Agreement.

Incentivizing referrals helps bring in new clients or customers. Rather than relying on an informal understanding, it is best to use a Business Referral Agreement, which sets out how much, when, and how the referrer will be paid.

What are the things to include in a Referral Agreement?

Valid referrals: The definition of valid referrals should be made clear in the agreement. For instance, if someone has provided contact information of a business for a lead, there is no guarantee that the business will convert as a lead so in those cases paying a referral fee is not viable. So, to overcome these problems a clear explanation of valid referrals should be written on a referral agreement.

Relationship between both parties: It is very crucial to define the relationship between two parties while drafting a referral agreement for them. This will help both parties to know about the referral fees and other terms and conditions.

The referral payment amount and medium: Another important thing to mention in this agreement is the payment amount and medium. This implies how a referral will get paid. They can get paid through a check, PayPal, or even in cash. There are different business practices for the referral payment amount like a fixed amount, or percentage of the total sales or subscription.

Payment date: Normally a referral will get paid once a referee is converted into leads. But the payment amount will get credited after a certain time like 30 days or 45 days. Most of the businesses that provide money-back guarantees on their services will pay after the end of that money-back guarantee period.

Why is a Referral Agreement important?

A Referral Agreement is important to increase the sales and revenue of any business through the use of referrals. Referrals are people or businesses who help other businesses get the leads, while in return asking for referral fees. It is similar to affiliate marketing where people get paid for each referral they make that converts into leads. For example, if person B’s recommendation made person A buy that product or service then B is eligible for a certain referral amount.

What is a typical referral fee?

There are different examples for the referral fee paid by different businesses however most of the businesses pay around 5 to 10% of the total revenue they made through the referral. So, one should clearly explain referral fees while drafting a referral agreement.

How long should an agency pay referral fees?

There is generally a 12-month caps on referral fees. Here agencies pay a certain percentage for the first year with the new client. However at times referral fees can be paid in perpetuity; meaning the fee will be paid as long as the client is signed with your agency. Similarly, if you want to encourage a long term referral without having to pay the fee forever, you could consider a step-down structure which allows you to reduce the fee overtime. For example; if you are paying 10% in the first year, it will be 5% in the second, 3% in the third and 0% after that. 

What is the difference between a joint venture and a referral agreement?

A joint venture is a kind of business model where two businesses combine together their unique skillsets for the purpose of accomplishing certain tasks for mutual benefits. For instance, a company working on SEO might joint venture with an email marketing agency to help grow each other because they almost have a similar customer base. Whereas a referral agreement is not focused on providing services, it is mainly focused on referring the clients to another business for certain referral fees.

Conclusion

A Referral Agreement is a simple contract between an individual or business with another business for certain referral fees in exchange for the leads. These agreements also aid in the marketing effort of any organization by increasing sales and profit. Having a valid referral agreement will attract more referrals because the process is transparent and the payment terms and conditions are protected legally.

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