Table of Contents
What are the steps?
1.Agree the high level commercial terms for your referral business
2.Create a Business Referral Agreement using Zegal
3.Ensure a consistent arrangement runs throughout your business
What is a referral agreement?
A Referral Agreement is a very important agreement in a smaller company’s marketing arsenal. It is used when an individual or company has agreed to spend effort referring leads or even in fact driving sales for another business.
It’s very common in a situation when for example the referrer has unique access to a market and the parties see that they can generate growth rapidly through a referral arrangement (and for the company receiving leads or sales, more quickly and cheaply than by investing directly in setting up the channel themselves).
Need to draft one now?
How to do it
Step 1: Agree the high level commercial terms for your referral business
So for example, what is a referral and how much money is paid to the referrer when a sale comes in. Follow the questions below to determine that the Referral Agreement is the right contract for your use case.
Step 2: Create a Business Referral Agreement using Zegal and make sure you both e-sign it.
Need to draft one now?
Step 3: Ensure a consistent arrangement runs throughout your business
If your referral arrangement is (as is very common) for one specific country or area, or even sales channel (eg web/channel partners/offline only/word of mouth) ensure that you have similar arrangements in place for these other sales channels. You don’t want any contract gaps. Your referrers are an essential growth tool for your business so make sure your contracts with them are signed and up to date.
What types of referrals does it cover?
Referral arrangements range from a very light touch, in the case of pure lead referral through to a referral arrangement that only pays in the event that a prospect buys a product or service.
In all referral arrangements, however, there is never a ‘sales agent’ relationship. This is very important. It means that that referrer doesn’t act as if they themselves sell the product or service. This type of relationship needs a more complex agreement. To help you decide whether the arrangement you are thinking of is well-covered by a Referral Agreement or if you need a different approach, ask yourself the following questions. If you answer all yes, then a Referral Agreement is good for your use case:
- Am I paying or being paid a commission to simply introduce interested prospects to a service they may wish to buy?
- Am I also or alternatively being paid a commission for introducing interested prospects to a service they actually buy?
- Is this happening in specific areas or sales channels?
- The referrer never holds stock of the products or gives clients the impression that they are responsible for the delivery of the products or services. This is an important point. If you’re not sure, read further here on how this might be a different kind of arrangement known as an agency agreement or consignment agreement.
What are typical referral fees?
This is clearly an important question, it’s also rather difficult to answer. It’s a ‘commercial’ not a ‘legal’ question, but an important way of evaluating the value of a referral channel is to determine the cost of doing it independently.
Let’s take two scenarios: the first is the example of a SaaS service that needs additional leads into its sales pipeline for a new market it is launching. The second is a very small company manufacturing tents that usually sells from its store and would like to use the internet to sell in another part of the country.
Scenario 1 – The b2b SaaS software platform is launching in the UK, having operated in Asia. The SaaS company wants the UK to account for ¼ of sales within 12 months. This is an ambitious target and requires a b2b sales force plus the fixed and commissions related to this setup. It will also take time to hire and build the team, slowing the rate of sales further. As an alternative, the SaaS company determines that for the UK alone, for a 12 month period it will work with an insurer that has a massive market share already and lots of prospects that will like this SaaS service. The combined cost of paying a referral fee and using a smaller inside sales team means this makes much more strategic sense. The two decide to enter into a 12-month agreement which is renewable after that date if it is working and makes economic sense at that time.
Scenario 2 – The small business making tents does not want to spend the time developing a web e-commerce platform but it is looking to drive sales outside of its own store. An affiliate website blog has a huge amount of traffic and readers who are interested in outward-bound activities. These readers are highly likely to buy tents and the gear that the small business sells. The site charges nearly 30% for leads that go on to buy a tent but the small business decides that the increased volume of sales and zero implementation cost makes up for this.
Client case study
Jonathan Yuan from Jonathan Yuan Pte Ltd uses Zegal to enter into a mutually beneficial relationship.