Since networking is the backbone of freelancing, oftentimes you’ll find yourself giving out freelancer referrals for clients projects – and sometimes you’ll even receive a referral fee for your effort. While there is nothing necessarily wrong with paid referrals, it’s important that they’re done right!
Freelancer referral fees are an easy and low-maintenance way to earn some extra cash as a freelancer.
And as long as all sides involved profit from it and nobody is being treated unfairly, paid referrals are a great way to help clients find the right talent for their projects.
However, while you may be used to referrals and paid networking, it is important to remember that not everyone is familiar with the idea. And so you may encounter people who have never heard of referral fees as a concept. In this article, we’ll explore what referral fees are, the importance of them and how to use referral fees the right way:
- What is a Referral Fee?
- Importance of Referral Fees for Freelancers
- The Referral Process
- Referral Fee for Contractors
- Pros and Cons of Referral Fees
- Freelancer Referral Fees – Red Flags
- Strategies for Maximising Referral Income
- How To Do Referral Fees the Right Way
What is a Referral Fee?
A referral fee, also known as a finder’s fee, is a commission paid to the person who recommends the right person to a client for a project. The freelancer who gets referred usually pays the referral fee.
Referral fees can be anywhere between 5%-25% of the cost of the project though this can change depending on the business, the industry, and the scope of the project in question.
Importance of Referral Fees for Freelancers
While some may think of referral fees as controversial, it can be argued that not only is it important, it can also offer benefits. These include:
- Getting compensated for your effort: Connecting clients with other freelancers takes time and effort – something that is of utmost importance to a freelancer. You can easily spend hours finding the right person, making introductions and so on and so it’s only fair that you are compensated for your time.
- Enhanced reputation as a valuable resource: By helping clients get in touch with the right people for the job, you create a reputation for yourself proving that you are reliable and can be trusted.
- Developing a sustainable network: Connecting clients with the right freelancers creates an environment grounded in trust, goodwill and fairness. This helps contribute to a development of a sustainable network.
The Referral Process
Asking for a referral fee is a pretty straightforward process. The most important thing you need to do is be upfront about it and let both parties involved know early on that there will be a referral fee.
You can explain that the fee helps cover your marketing and introduction costs and that it represents a win-win approach for all parties involved.
💡 Make sure you put your referral fee in writing. Create a one-page letter of agreement and have both parties sign it.
Referral Fee for Contractors
If you are the one getting referred, deciding on the exact referral fee or commission that you’d pay someone who refers you to a freelancer project is up to you.
There are some details you should consider, though:
- Are you paying a referral fee for a lead or only if you get the job?
- Is the referrer further involved in the project?
- Is the referrer managing all client-side of things?
The standard referral fee percentage for contractors could be around 10% for closed jobs. It could start at 2 – 5% for an email introduction with the client and go up to 15 – 20% for projects where the referrer deals alone with the client.
You could also work with flat referral fees. For example a $100 referral payment for $1000 – $3000-projects, a $300 payment for $3000 to $5000 projects, and $500 for projects up to $5000.
Pros and Cons of Referral Fees
Like everything else, there are both pros and cons when dealing with referral fees. These are as follows:
Advantages of referral fees for freelancers
#1 Additional income stream
As mentioned above, referral fees are a good way to earn an additional income. Suppose you’re too busy to take on a project or your skills don’t line up with what a client wants. By referring someone else for the job, you’re still getting paid – even if it’s a small percentage.
#2 Networking opportunities
Referrals are key to building relationships and strengthening them. By introducing people and helping both clients and contractors get what they want, you’re expanding your reach and networking opportunities.
#3 Builds brand value
As stated above, by fostering and building trustworthy connections, you position yourself as an expert in your industry. Plus when you connect freelancers with a valuable opportunity, you provide them access to a resource they might not have discovered on their own. This could help unlock new opportunities for you in the future.
Disadvantages of referral fees for freelancers
#1 Potential conflicts of interest
Referral fees could lead to biassed recommendations. You could end up recommending freelancers who offer you a higher fee than those who actually fit the description of what the client needs.
#2 Dependency on referrals for income
Because referral fees are an easy way to earn a little extra, you could end up depending on them for your income and neglecting your freelance business. This can lead to you being unable to expand and build a sustainable client base.
#3 Your name on the line
When you refer a freelancer to a client, you put your reputation on the line, even if you’re not involved in the project. If the freelancer fails to meet the client’s standards, it can reflect poorly on you, since you’re the one who referred them in the first place.
Freelancer Referral Fees – Red Flags
1. Not providing full-disclosure as early on as possible
Referral fees should be treated as a condition in a contract. You cannot just slip them in at a later date. If you expect to be paid a lump sum of money or a percentage of a deal because you served as the middleman between contractor and freelancer, you should mention it right away.
2. Asking after the freelancer and the client have agreed on a price
This second red flag can lead to an infuriating escalation when not providing full disclosure. There are people who request referral fees after the deal between the two parties has already gone through. This is incredibly unfair for a couple of reasons.
First, it may look like you’ve essentially dictated a fee after realising the overall project budget – not a great look.
Secondly, the freelancer who is actually doing the job should be aware of the referral fee, thus giving them some possibilities. They can negotiate with the client for a slightly higher pay than their usual price to make up for the cost of the referral. Tricking people out of that option with an unexpected request of a referral fee is just not good practice.
3. Acting like it’s completely normal
No matter what freelancers that charge fees for referrals claim, freelancer referral fees are simply not an industry standard. You cannot expect a referral fee just because it is a thing that exists.
If someone acts like their late mention of a commission is completely normal, you might consider not working with that person in the future.
Strategies for Maximising Referral Income
#1 Building strong professional relationships
One of the best ways to maximise referral income is by building strong connections with other freelancers. This allows you to understand exactly what a freelancer does and how their work can help clients when you are either too busy or not a right fit for the project. The best thing you can do is to network with freelancers who offer complimentary services to yours.
For example, if you’re a front-end developer, you can start building relationships with web or UI/UX designers.
#2 Providing excellent service to encourage referrals
If you want to be referred by other freelancers, you need to make sure your business is referable and that the quality of your work is excellent.
Similarly, if you want to maximise your referral income, you need to make sure your process of referring others is excellent and that you are able to provide value not just to the client but also to the freelancer.
You can’t just connect two people and expect payment, you need to make sure that their needs align and that they’re a good fit.
#3 Negotiating referral fee agreements
Because freelancer referral fees are not an industry standard, it can be hard to do market research and come up with a number that is appropriate. However, you want to make sure that you come to an agreement before any work is done and that the fee is mutually beneficial for all parties.
How To Do Referral Fees the Right Way
Honesty and transparency
The one surefire way to implement referral fees is to be completely open about it with both sides.
Tell both the client and the freelancer you’re referring, and if somebody doesn’t agree with the deal, they can walk out.
Yes, the client and the freelancer you referred can now just do the deal without giving you a cent. But they both know they are working with you for a reason. Don’t assume everyone is going to stab you in the back as soon as they get the chance. Honesty is the best policy when it comes down to paid referrals.
Dealing with unexpected referral fees – Say no!
There really is only one, very simple way, to deal with people who ask for referrals after the fact. Stay firm and say no. As long as there wasn’t full disclosure from the beginning, you are not legally obligated to pay someone anything they just decide to ask for out of the blue.
People who do that won’t stay in business for very long. And they are definitely not people that you want to be working with on a regular basis.
While they may be able to squeeze out fees from a few newbie freelancers, in the end, unexpected referral fees requests will burn all their business relationships, which are the single most important things in a business model that relies on commissions.
So, if somebody asks you for a fee after you’ve already agreed to do the work or even started doing it, just say no. Unexpected referral fees are unprofessional, unsustainable as a business model, and, quite frankly, a disrespectful thing to do.
Have you had to deal with unexpected referral fees? If so, how did you handle them? How much do you pay for referrals? We are always very happy to hear from our readers, so tell us your story in the comment section below this article!
