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.


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What is a Referral Agreement?

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 the 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.

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 of the referral fee paid by different businesses however most 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 much should agencies pay for sales referrals?

Agencies are usually middlemen who are handling the business of their clients. Hence for a sales referral, they will usually try and keep the amount to a minimum. Generally, they will pay 5%- 10% of the amount they receive from the business.  However, it is not rare for agencies to pay 0% in referral fees either as the referee at times is already offered some amount of  payment beforehand. This can especially be seen in the case of influencer marketing and promotions. 

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.

How to create a referral agreement?

Creating a referral agreement is easy if you follow the guidelines. Mainly, it’s divided into two parts:

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.

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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