How a referral fee works
A referral partner introduces a prospect, your sales team runs the sale, and you bill and support the customer. When the customer signs and pays, the partner earns a fee under the terms of their partner agreement.
The agreement should answer four questions before the first referral arrives: what counts as a valid referral, how long the partner has a claim on the prospect, how the fee is calculated, and when it is paid. Leaving any of these vague is the most common source of disputes in referral programs.
Common referral fee structures
- Percentage of first-year revenue. One payment, a share of the customer's first 12 months. Simple and easy to budget.
- Recurring share. A percentage of each payment for a set period, such as 12 or 24 months. This overlaps with a revenue share.
- Flat bounty. A fixed amount per qualified customer, regardless of deal size.
- Tiered rate. A higher percentage once a partner passes a number of referrals, often tied to partner tiering.
Most programs also include a clawback so a fee is returned or not paid if the customer cancels and is refunded within an agreed window.
Referral fee vs reseller margin
A referral fee is paid by you to the partner after you bill the customer. A reseller margin is the difference between the price a reseller pays you and the price it charges the customer, so the reseller keeps it directly. A customer should earn a partner one or the other, never both.
Example
Cobalt Consulting introduces Kestrel Foods to a vendor of inventory software. The vendor's referral agreement pays 15% of first-year revenue, 30 days after the customer's first payment.
Kestrel signs an annual contract for $36,000 and pays on April 1. The vendor approves the commission on May 1 and pays Cobalt $5,400 in its May payout run. If Kestrel had cancelled for a refund in its first 30 days, no fee would have been due.