Referral fee arithmetic: what a partner's referral is really worth to you

Step 1: Find your three numbers

Pull the last 12 months of jobs and work out:

1. Average job value. Total revenue divided by number of jobs. Say $2,800.
2. Gross margin. Revenue minus direct costs (materials, labour on the job, subcontractors), as a percentage of revenue. Say 38%.
3. Win rate on referred enquiries. Of the enquiries that came from another business, how many became jobs? Say 55%.

If you don't know the third number, that's normal. Use a cautious estimate for now and start recording it; our tracking service shows the fields.

From the first two, the gross margin per job is $2,800 × 0.38 = $1,064.

Step 2: Work out your ceiling

The ceiling is the most you could pay per referred job before it stops making sense. It isn't the figure you should pay; it's the line you must stay well below.

Start with the gross margin per job, $1,064. Then subtract what you'd want to keep to cover overhead and profit. If overhead and a fair profit need about 60% of gross margin, that leaves $1,064 × 0.40 = $426 as a theoretical ceiling per completed job.

If you paid per enquiry instead, your ceiling falls with the win rate: $426 × 0.55 = $234 per enquiry. That's one reason per-enquiry fees are risky. A run of poor referrals costs you money without producing work.

Step 3: Compare the three structures

No fee

Partners refer each other because it helps their customers and because work flows both ways. This is the simplest arrangement, needs the least paperwork and is the easiest to disclose.

• Cost per job: $0.
• Best when: referrals flow roughly evenly in both directions.
• Risk: if one side sends far more, resentment builds. Review the balance quarterly.

Flat thank-you per completed job

A fixed amount, paid after the job is complete and the customer has paid you. Say $150.

• Cost per job: $150, or about 14% of the $1,064 gross margin.
• Return: $1,064 ÷ $150 ≈ 7 to 1 on gross margin.
• Best when: referrals mostly flow one way, or job values are fairly similar.
• Risk: low. It's easy to explain to customers and easy to record.

Percentage of job value

A share of the job's revenue. Say 5%.

• Cost per job: $2,800 × 0.05 = $140 on an average job, but $400 on an $8,000 job.
• Best when: job values vary widely and partners send large jobs.
• Risk: higher. The partner needs to trust your invoice figures, disputes are more likely and disclosure wording gets more complicated.

Side-by-side

For most Burnaby owner-run businesses, no fee or a flat thank-you is the sensible start.

Step 4: Check the monthly picture

Fees look different over a month than per job. Suppose three partners send a combined eight referred enquiries a month. At a 55% win rate that's about 4.4 jobs.

• Gross margin: 4.4 × $1,064 ≈ $4,682
• Flat thank-yous: 4.4 × $150 = $660
• Gross margin after fees: about $4,022

Compare that with what the same jobs would cost from other channels. If paid search costs you $90 per enquiry and you win a third of those, each job costs about $270 in ad spend alone. A $150 thank-you per completed referred job is cheaper and usually brings a warmer customer. If you want to compare against general marketing in more depth, our sister site BurnabyAgency.ca covers paid search planning.

Step 5: Decide when to pay and how to record it

A few practical rules:

1. Pay after the customer pays you. Not when the job is booked, and not when the quote goes out.
2. Pay from the record. Every fee should match a line in your tracking with date, partner and job value.
3. Pay on a schedule. Monthly or quarterly, with a short statement to the partner listing the jobs.
4. Ask your accountant how to record fees paid and received. Both sides will usually need to account for them.
5. Disclose it. If you pay a fee, the customer should know. See the disclosure guide for wording.

When a fee is a bad idea

Paying makes things worse in some situations:

• When it changes behaviour. If a partner would recommend you only because of the money, the referrals will be weaker and your reputation is tied to theirs.
• When your trade or profession restricts it. Some regulated fields have their own rules on referral payments. Check yours before agreeing anything.
• When you can't track it. Fees paid from memory lead to disputes.
• When the balance is even. If you and a partner send each other similar volumes, a fee just moves money in a circle and adds paperwork.

Common mistakes

• Copying someone else's percentage. Their margins aren't yours.
• Paying per enquiry. It rewards volume, not quality.
• Raising a fee to fix a slow partnership. Usually the problem is response time or fit, not money. Look at the partner scorecard first.
• Forgetting GST and bookkeeping. Ask your accountant early.
• Leaving it unwritten. Put the structure, amount and timing in your written terms.

A worksheet to use now

Fill in your own figures:

• Average job value: $______
• Gross margin: ______%
• Gross margin per job: $______
• Share of gross margin you need to keep: ______%
• Ceiling per completed job: $______
• Win rate on referred enquiries: ______%
• Ceiling per enquiry: $______
• Chosen structure and amount: ______

If the ceiling is under $100, a fee probably isn't worth the paperwork; a reciprocal no-fee arrangement will serve you better. If it's several hundred dollars, a modest flat thank-you well below that line is usually fair to both sides.

Want help running these numbers with your real data? See pricing or reach us through the contact page.