What to Do When A Client Demands an Unexpected Referral Fee

 

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I was in the park in Chicago when I saw a client's number (let's call him Dan) light up my phone. When I answered, Dan was in a meeting with a client of his that needed a new website made (at the time, I was a web designer).

He wanted to make sure to connect us right then and there, and handed the phone off to the new client.We had a brief chat and they were ready to go; we discussed rates, what they needed, and when the project would get underway. I had just started my business and was thrilled to receive a referral from a happy customer! And I couldn't believe how well it had gone. And without weeks of back-and-forth.

About 30 minutes later I received another phone call from Dan. I thanked him for the referral and told him how much I was looking forward to the project. He responded with,"Great, since it was a referral from me I expect 20 percent of the project revenue." I was dumbstruck. I had just started my business a few months ago, and it never occurred to me that when people gave me referrals they would expect a cut. Quickly doing the math in my head, I realized that the referral fee would take this from a decent project to one that was barely worth my time. I felt stupid and green, and on the spot with him on the phone I had no idea what to do.

I muttered out some kind of response, and ended the call as quickly as I could.

Something about it just didn't feel right to me. Was I being naive, or was he being presumptuous? Maybe this was how business was always done and I didn't know it?

So I did what any 22-year-old entrepreneur would do; I called my father. He's had been self-employed as an architect for more than 25 years and I knew that this situation wouldn't be new to him.

He gave me some advice that helped me navigate this sticky situation. What can you do when you're at odds with a customer -- the person who is supposed to be "always right?" The following tips will help you assess and move through client conflicts.

  1. Ask for Advice
    The fastest way to crash and burn as a business owner is to try to go at it alone. Don't be afraid to look stupid, or ask someone for help. This is one reason it's critical to befriend entrepreneurs that are further along the path than you. My dad explained how referrals fees work -- that it varies by industry, some people do them and some don't, but it was definitely out of line to grant the work and then ask for a cut after the fact. The guy had be presumptuous, but now came the biggest challenge. Should I keep my mouth shut or speak up? Dan was one of my first clients, and we were still actively working in his project. I didn't want to lose his business or offend him. But I knew I needed to stand up for myself. So I cooled down and thought about why I was calling Dan, and what I hoped would happen.

  2. Decide What You Want
    It's easy to react emotionally to a situation. Before a potentially confrontational situation, think about how both parties might benefit, instead of proving yourself right. I decided I didn't want to give referral fees, and I needed to tell Dan my policy to avoid this in the future. So with shaky fingers, I dialed his number. I desperately wanted to put it off, but I knew that this needed to be resolved as soon as possible.

  3. Honest Communication Wins
    I believe that when confronted with a sticky situation, a honest explanation is the best policy. I told Dan the truth; that I was caught off-guard and that I didn't feel it was right of him to ask for a cut after the fact.

  4. Sometimes You Have to Agree to Disagree
    I wish I could say that we came to the perfect resolution, but that isn't always reality. Our perspectives were fundamentally different on this issue; he thought that whenever a referral is made, that party should be given a cut. I disagreed. I ended up not doing the work for the client he referred, and he told me he would find someone else to refer work to.

  5. It's Business, Don’t Take it Personally
    At the end of the day, I understood Dan's perspective. He thought he should be paid for his referrals so he found a designer who would do so. I took this as a difference of opinion, not a personal attack. We finished up the project and he was happy with my work, he just didn't send referrals my way.

This potentially disastrous situation taught me that professional disagreements are not the end of the world. Conflicts will arise, unexpected situations will come up, and sometimes you need to go your separate ways. Although it was gut-wrenching at the time, I'm glad I stood up for myself.

The experience allowed me to establish a clear policy with all of my clients, and showed me that when you run your own business you call the shots. It can sometimes feel easier to just go along with what your told, but if you're serious about crafting a successful business you have to stand up for what you believe. Even if it means a few uncomfortable situations along the way.

About the Author: Laura Roeder is a social media marketing expert who teaches small businesses how to create their own fame and claim their brand online. She lives in Venice Beach, California, where she video blogs, makes frequent trips to the library, and volunteers with local middle schoolers. She is a member of The Young Entrepreneur Council (YEC), an invite-only nonprofit organization comprised of the world's most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to unemployment and underemployment and provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business’s development and growth.

About Laura Roeder

Laura Roeder is a social media marketing expert who teaches small businesses how to become known as #1 in their field and claim their brand online. She is the creator of Creating Fame and Social Brilliant.

One Response to What to Do When A Client Demands an Unexpected Referral Fee

  1. Ryan Lowe says:

    Hey Laura,

    I enjoyed your post and you give some great ideas on referrals. This happened to me a few years back, but I handled it differently, and it actually worked out quite well for me.

    I had a client that asked for a referral percentage based on a friend of theirs that needed some "help" (more consultation that web, but it did include social and design work). Very similar to your case it was after the fact and even after a contract was signed with my clients friend. I told my client that he would not receive a percentage but going forward I was willing to offer him a percentage (it actually was 20%), for my "help". This worked out well as we were both able to come to a solution and we both walked away from this scenario happy. Since then I have been referred 2 projects from him and he has received compensation for the lead.

    I kept it the conversation comfortable (even though it could have easily been awkward). Hope this helps any future scenarios. I am all for saying no and agreeing to disagree, but sometimes, in the right scenario with AMIABLE personalities, everyone can walk away happy.

    /ryan

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