Referral Fee Model
Is the referral fee worth the margin it rides on?
Someone wants a share of every job they send you. The question is not whether the leads are good. It is what the fee costs against the margin it rides on, and what happens after the first job.
Your numbers
Sample numbers: a worked example. Change them to yours.
What the customer pays you, before any fee.
Revenue less the cost of doing the job: labour, materials, subs. Not net profit.
After the first job. This is where a fee with no cap stops being a marketing cost.
Of the capacity these jobs take, how much would you have filled anyway from your own pipeline.
Advertising, quoting time, site visits. Per job won, not per lead.
Every figure below updates as you type.
A job with the fee
$966
$966 a job with the fee, against $779 if you decline. The fee clears, on the first job.
The fee clears, on the first job
Taking the work is worth $187 more per job than leaving the slot to your own pipeline.
That holds only while you fill less than 68.2% of that capacity yourself. Say yes to the first job, and cap the fee there.
The first job, both ways
| Per job | Take the referral | Decline it |
|---|---|---|
| Invoice | $4,200 | $4,200 |
| Gross margin | $1,596 | $1,596 |
| Referral fee | -$630 | $0 |
| Your own cost to win it | $0 | -$180 |
| Chance the slot is filled at all | 100% | 55.0% |
| Expected margin | $966 | $779 |
Declining is not worth nothing. It is worth whatever you fill the slot with, times the odds you fill it. That is the comparison the fee has to beat, and it is the one nobody in the thread makes.
One customer, over their life with you
| Lifetime of one referred customer | Fee on every job | Fee on the first job only |
|---|---|---|
| Jobs | 3 | 3 |
| Total invoiced | $12,600 | $12,600 |
| Total referral fees paid | -$1,890 | -$630 |
| Margin you keep | $2,898 | $4,158 |
The cap is worth $1,260 per referred customer. The introduction happens once. The fee, if you do not cap it, happens every time that customer comes back, which is the part that turns a marketing cost into a claim on your book.
If you price the fee into the job instead
Building the fee into the price sounds simple until you do the division. A fee charged on the whole invoice has to be recovered out of margin only, so a 15.0% fee on a 38.0% margin needs a 65.2% price increase to leave you exactly where you started. Decide whether referred customers will pay that before you promise yourself you will pass it on.
| To keep your margin dollars whole | Amount |
|---|---|
| Invoice needed on referred jobs | $6,939 |
| Increase over your normal price | 65.2% |
| Margin after fee at that price | $1,596 |
What to actually say
Yes, on the first job from each customer, at 15.0%. After that the customer is yours and the fee stops. Put the cap in writing before the first invoice, not after the third. If they want the fee to continue, that is a different arrangement and it should be priced as one, because across a year it is $45,360.
Worked example, not advice on your specific deal. Gross margin means revenue less direct job cost, so overhead and owner pay still come out of what is left. If the referred work carries a different margin than your own work, change the margin figure and read the comparison again.