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…