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Advantages Outweigh Disadvantages of Referral Programs

Updated on March 23, 2017

Referral Programs

Have you consider additional income potential from referrals? A referral is any valuable and advantageous type of information transmitted from one party to another. Individuals who typically make referrals for income are on the job, such as real estate agents, insurance and business brokers, human resource managers, mortgage bankers, etc. Referrals are ordinarily implemented between members of large or small networks, groups or organizations. As there is no established method or format for making referrals, there is also no formal compensation for referrals either.

Traditionally, business and employment opportunities were referred strictly by word-of-mouth. For example, Ted—a real estate broker, provided a referral to Harry—a mortgage banker, informing that, Sally—Ted’s client, is planning to purchase the house she has been renting. Harry then contacts Sally to offer mortgage products. If Sally accepts Harry’s services, Harry then courteously and informally pays Ted remuneration for the referral. In another example, Liz—a human resources director, offered Rob—a coworker, compensation for referring his foreign friend to fill a job opening requiring an uncommon language. Compensation for referrals was informal repayments or “financial gestures” provided for advantageous and necessary information.

Advantages and Disadvantages of Referral Programs

Today, providing referrals has evolved into a single industry. Business or employment referrals are now predominantly contractual agreements between parties, where contractual terms are binding and enforced in courts. Large and small companies, such as American Express, Verizon, Legal Aid Society, Christian Women’s Central, CenturyLink and ZTYLUS, all use referral programs for customers, members or employees. Employment staffing agencies frequently use referral payment programs to service employers’ precise needs. Referral programs have become critical marketing strategies for businesses throughout the US.

Yet still, there are advantages and disadvantages of utilizing referral programs. As an important advantage, referrals increases income for businesses. Since referrals are usually communicated from one person to a second person regarding a third person (or party), referrals also authenticate service quality of a third party. Finally, referrals continually spread. If individuals or organizations do not accept a quality referral, the referral information is still passed on to other individuals or businesses.

Referrals, on the other hand, unfortunately require remuneration. As most referrals are documented or contracted transactions, referrers must be paid set compensations (i.e., commission rates, fixed fees, etc.). Another disadvantage of referrals is dishonest or illegitimate referrals. Individuals may refer friends or family members for business opportunities or employment, although those friends and family members are not qualified or capable to perform. Finally, referral programs may be difficult to implement in some regions. Legal restrictions, lack of people and businesses to refer or simply inability to compensate referrers may impede effective implementation of referral programs locally.

Advantages clearly outweigh disadvantages of referral programs, as referral programs are still amply used today. Implementing a referral program is easy once referral terms are fully established. Satisfy compliance and financial requirements before commencing referral programs. Referral compensation should be competitive to ensure program demand. Consider piloting referral programs to assess viability and associated costs, adjusting as necessary. Costs associated with effective referral programs are usually offset by exponentially-increased income levels.

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