Why referral compensation doesn’t work for services firms

The almighty referral. Every business salivates over referrals, especially professional services firms in which the sales pipeline beyond a few weeks is blurry.

Professional services firms covet referrals. The close rate is higher and the sales cycle is typically shorter. The endorsement of a trusted intermediary means a lot to a client searching for a professional services to engage with.

Many professional services firms try to generate more referrals and more consistently by offering to compensate potential referring parties. In theory it makes sense. Compensating others to refer potential clients should mean everyone wins. Compensating referral parties in the product space works and takes on many different flavors. Everything from consultants who’s primary objective is to generate leads for a company they are contracted with to affiliate programs where companies and people get paid for referring a potential customer to another company.

Compensating for referrals in professional services doesn’t work as well as it does for other types of companies. Professional services is such a trust and credibility based relationship between a firm and a referrer that compensation for a referral actually taints the relationship and referrals. Referrers send referrals to professional services firms because they believe they are acting in the best interest of who they are referring, not themselves. When you add compensation into the mix, the dynamic changes and the referrer no longer feels as though they are acting selflessly. By taking compensation for a referral they are now serving their own interest as much, if not more than than of who they are referring. Compensating for referrals as a professional services firm actually inhibits referrals more than it encourages them.

I have seen many professional services firms attempt to implement a referral compensation program to increase lead generation and I haven’t seen one work yet. This is another area of difference between professional service’s strategies being different than that of product companies. I get it, professional services firms are seeking more predictability in their sales and compensating for referrals seems like an easy and quick way to pump up sales. But it doesn’t work. Another easy button and quick fix approach that doesn’t work for professional services firms as much as we would like to believe that it will.

Professional services firms shouldn’t give up on fostering referrals but just not through compensation for referrers. The best way for professional services firms to generate referrals is by cultivating relationships with potential referrers and by being visible. In my book, Sell Naked: And other Advice for Growing and Managing Services Firms, I write about Visibility Value. One of the reasons a firm’s Visibility Value matters is because it is helps to maintain mind share with potential referrers who may not be engaging with any of a firm’s content, events, or activities directly. Here are some things professional services firms can do to foster relationships with potential referrers:

Compensating for referrals also delivers less qualified potential clients. A referrer who is getting compensated and therefore shifted their perspective from being selfless to selfish is going to now refer potential clients of much less quality causing the recipient firm to spend time chasing a client who isn’t likely to engage.

Compensating for referrals changes so much of the dynamic between a referrer and a firm that it actually might do more harm than good in the end. It monetizes an otherwise healthy and respectful relationship which may cause a referrer to drift away from referring potential clients to a firm.

My recommendation for professional services firms is to cultivate and value relationship with referrer but not to compensate them. There is no proof compensating referrers actually works in the long run and I believe there is lot of evidence it can ultimately be harmful.

product & company builder | speaker | author | professional services firm growth coach

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