Seven Points to Consider When Offering a Referral Bonus

May 31, 2010 by  Filed under: Marketing 

Referral bonus programs (also called “ambassador” or “affiliate” programs) are a popular way for professional service providers to encourage people to send them qualified prospective customers. Are you considering offering such a program? Here are seven points to consider to make it more effective.

1. Know why you want to offer a referral bonus program. Your primary goals should be to save you time in getting qualified prospects. A referral bonus program will not significantly reduce your customer acquisition costs. If your system is well established and promoted, it can also improve the quality of your prospects.

2. Most bonuses are too small to be meaningful. Make it a dollar amount that grabs the attention of someone who could offer you a well-qualified referral. When setting your referral bonus, consider the following:

a. What is your total cost to acquire a customer? Include all of your acquisition costs, such as networking, advertising, marketing, websites, printing. If you are offering services, your customer acquisition costs could be from 10% to as much as 40% of the fee you collect from your client.

b.The affiliate bonus should be on the order of magnitude of your customer acquisition cost.

3. Make your referral bonus program very easy to understand. Clearly state the dollar amounts that a person should expect, as well as when, how, and under what conditions a bonus is paid. Avoid multilevel affiliate schemes, because they are expensive to administer and do not provide a measurable advantage to the person making a referral to you.

4. Have a good tracking and accounting system in place so that the bonuses go to the right person. When you accept a referral from a participant in your referral bonus program, you are entering into a contract with the referrer. Consider how to handle cases where the person referred terminates the contract early or requests a refund.

5. Offering free services, products, or a percentage discount coupon for a future visit is not as valid a motivator as a cash payment.

6. Be aware, informed and prepared before embarking on a referral bonus program. If your marketing base is weak, you have a small list or you are not well known, this strategy may not work as well. A referral bonus program may trigger financial, tax and legal obligations. Consider it as an add-on to existing marketing efforts.

7. Keep in mind that many people who will give you great referrals are usually not motivated by money, but rather by their respect of what you do and what you offer. Some people may be turned off or even feel insulted when you offer money to them! Sometimes love is a bigger motivator than money.

Davender Gupta is a business leadership coach on a mission to help passion-driven people with Big Ideas to develop the focus and discipline to Power their Vision from Passion to Profit. Join the discussion on his blog frompassiontoprofit.com and his main site coachdavender.com He welcomes your questions by e-mail at coach@davender.com or by phone, toll-free, at 1-888-788-8844.

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