AboutDavid E. Coffman CPA/ABV, CVA Expertise General questions about small business management, planning, and measuring and improving business performance. Specific questions about what a business is worth.
Experience Certified Public Accountant, Accredited in Business Valuation (ABV) and Certified Valuation Analyst (CVA). Over 30 years experience advising, owning and operating small businesses. Specializing in business valuation and innovative consulting services for small businesses since 1997.
Your response would be greatly appreciated. Regarding referral bonuses for our cosmetics business, people want to refer clients to us. These clients are typically beauty schools. How much each will purchase will have a wide range. How much referral bonus should we give to the person who referred us to the school? Is it typical practice to keep giving a commission to the person for every order the school makes. This means we have to give him a bonus for the 2nd order, 3rd order, 4th order, etc. What suggestions do you recommend?
Thank you in advance for your assistance.
Answer There are a number of ways you could handle this situation. One way would be to set up an affiliate-type program where referrals would get a small percentage of all future sales to that customer. There is a lot of recordkeeping involved with this option. I would not suggest it unless you really wanted to expand and promote the affiliate system as an ongoing marketing program.
A much simpler way to do it is to give a larger percentage for the first order only. The amount would depend on things like average order size and gross margin. A referral fee of ten to twenty percent of the initial order is common in many industries.
Another simple method is to pay a flat fee based on the average cost for you to acquire a new customer. For example if it typically costs you $100 to get a new customer then you should be willing to pay that amount as a referral fee. The cost to acquire a new customer can be calculated by taking your sales and marketing costs that focus on acquiring new customers and divide it by the number of new customers you acquired during the period.
Get input from the referral sources by asking for suggestions or running some of these ideas by them. Pick one method that makes sense to you and see how it works. Then tweak it until it works the way you want.
