What is a Referral Agreement?
A Referral Agreement is a formal contract between two entities, where one agrees to recommend potential clients or customers to the other, in return for a specific fee, commission, or another form of agreed compensation.
Such agreements are prevalent across numerous sectors, providing a structured basis for business collaborations that depend on third-party recommendations to attract new clientele or business prospects.
Implementing a structured approach to incentivize referrals can significantly enhance client or customer acquisition. To ensure clarity and fairness in these transactions, utilizing a Business Referral Agreement is advisable. This agreement clearly outlines the compensation details for the referring party, including the payment amount, timing, and method, thereby formalizing the referral process.
For SaaS companies, instituting a formalised referral strategy through a Business Referral Agreement can significantly streamline the process of acquiring new customers.
What 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.
Creating a referral agreement is easy if you follow the guidelines. Mainly, it’s divided into two parts:
Other basic requirements:
a) Date: It’s mandatory to add dates at the beginning and end of the contract. The date at the beginning of the document represents the date of creation of the agreement whereas the date at the end represents the day of signing.
b) Name and Roles of Pary Involved: Firstly, you have to identify the names of the person and their roles. If it’s a company you have to narrow down the name of the person responsible and update their roles. Secondly, you also have to mention who is the service provider and who is the referer.
c) Duration of Agreement: Duration of the agreement should be clearly mentioned in the agreement whether its long term or short-term agreement.
d) Consideration: The amount paid by the service provider to the referral should be clearly mentioned for the finalized sales.
e) Acceptance: As it is a non-standard, negotiated agreement that requires a lot of customization, you have to clearly mention in which condition will the referral be accepted.
Specific Clauses:
a) Referral: It’s mandatory to define what is the meaning of “referral” in the agreement to ensure the topic is clear.
b) Referral fee: You have to mention the fixed amount paid as commission for the referrals.
c) Referral Party’s pay period: You have to mention the period when you will be paying commission to the referrer.
d) Privacy: As a referral agreement requires the exchange of a lot of information, ground rules should be set for confidentiality and privacy reasons.
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.
Before starting a referral program, make sure to complete proper due diligence.
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.
Referral agreement template
Creating a Referral Agreement is a strategic step for any business looking to expand its reach through partnerships and referrals. To ensure that such agreements are comprehensive, legally sound, and tailored to specific business needs, Zegal offers a streamlined and reliable solution.
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