Don’t Give Away the Farm

Inevitably, whether you are an independent sales rep, service provider or make your own products, someone is going to ask you for a “finders’ fee” or a “referral fee” when they refer new business to you. A finders’ fee is typically given to an intermediate person who leads you to new business which you would not have gotten otherwise. Brokers and independent sales reps are familiar with these types of incentives because in their world of business, they are accustomed to getting paid a percentage of the business they close. Clearly, some professions, like doctors and financial advisors, are not allowed to give or receive commissions so this does not apply to them.

If you haven’t given this area much thought, one day you will be asked, and possibly be put on the spot, to provide the type of finders’ fee you offer. In your eagerness to give a reward and assure you get future business, you offer too much and the incentive may be too costly to your bottom line. Of course, you want to reward your referral partner or source for bringing you new business but the reward, which is usually monetary, has to make sense. Consider it a discount or expense of your service or product and the cost of doing business; make it too high and it will pain you each time you write that check and make it too low and your contact may look to partner with someone else.

Sporadically offering different incentives to different people is not wise either since it could come back to haunt you because people talk and may find out someone’s deal is better than theirs. Another downfall of offering commissions without a plan is it will be harder to keep track of and later asking your referral partner how much you offered them will lower your credibility.

Here are 3 few steps in setting up a system which is both fair to your partners and your bottom line:

• Depending on your business, figure out the type of incentive or commission you want to offer. Smaller consumer product businesses can use similar products as give-aways. Service businesses can offer future services provided at a discount or a monetary reward. Whatever you offer, make sure to place yourself in your referral partner’s position and ask yourself, what would motivate you to bring in more business to someone else.

• Once you have determined what you will offer, then you have to figure out “how much” to offer. You should calculate the profit margin for your product or service and make sure to include your overhead fixed costs so you get a true picture of what you make per unit. Only after you’ve determined your profit can you calculate a range of what you can pay out as an incentive. Whether you make $25 or $2,500 per deal, you must determine if you can part with 5%, 10%, 20% or more as an incentive fee. It can be a range, something between 5-10% so that you have some flexibility.

• After determining what you give away and how much, you should outline your policy in some type of agreement format. This can be used as your own guideline to share with your partners or as a legal document depending on the type of business you have. A written policy will also let others know you have a previously thought out structure which is the same for everyone. It will reduce the chance of someone wanting to negotiate with you.

This issue will present itself at some point in your business career and how you handle it will determine the strength of your referral sales contacts, your business profitability and will also reflect on your level of professionalism. Lay out your plan ahead of time so you can offer a commission/incentive plan you can live with without having to give away the farm.