May 262009

Paid Referrals: Smart Marketing or Corrupt Bargain?

RKG has built its business on word-of-mouth marketing. Many of our existing clients called us out-of-the-blue initially saying: "we hear you guys are good and we want to work with you." The value of those referrals is incalculable, yet they come free of charge.

Or do they?

Over the years a number of other service providers have approached us offering to refer their clients to us...for a fee. They usually want us to return the favor and refer our clients to them. Usually these deals are structured that the referring party collects some percentage of the revenue generated by the party that got the customer.

In the early days of our company, we signed a couple of these deals with companies we held in high regard. We figured: we need to get the word out, and we're too cheap to buy advertising; we won't refer our valued clients to vendors who aren't good at what they do, that would be wrong, but if we like the other company, what's the harm?

We only did a couple of these deals and terminated the last of them two years ago. Ultimately we found that most of the prospects referred to us weren't a good fit for our services, and, we found that we really didn't have any interest in pushing particular vendors on our clients. There were all kinds of headaches associated with which clients were really referred by the other party versus companies we were already speaking with and vice versa, but moreover, it just didn't feel right.

To our thinking a company serves the people who pay them. We have no interest in serving anyone other than our clients. Indeed these deals strike us as a conflict of interest. Are we recommending said vendor because we think they're a great choice for our client, or are we trying to make a buck off a referral? We don't want to be in that business.

It seems that these deals are increasingly prevalent, and the number of firms seeking mutual referral deals with us keeps growing. It's also become clear that many of these deals are non-exclusive. In other words, we might be one of many PPC firms recommended by said vendor. That raises the question: which firm is at the top of your list? The answer: the one that pays the largest commission. This starts to look very much like affiliate marketing in B-to-B services and for the same reasons we don't think much of affiliate marketing as it's practiced, and we don't like commissioned sales, we don't like this trend either.

Third Party vendor rankings work pretty much the same way as far as we can tell, but that doesn't bother me as much. Most folks probably recognize that the rankings track closely to the amount of advertising the vendors buy and that's to be expected. Profit making trade organizations need to take care of their advertisers and/or paid clients because they are their principal source of revenue.

But I don't think the scope of these mutual referral networks are well understood. Seems to me folks aught to come clean and say: "Hey, I think the world of company X, but you need to be aware that they pay me a commission for referrals".

Rest assured that if RKG speaks highly of another vendor it is because we think highly of them. You can also rest assured that if you ever hear someone say nice things about us, it's not because we're paying them to do so -- we aren't.

All in favor of transparency say "Aye"!


3 Responses to "Paid Referrals: Smart Marketing or Corrupt Bargain?"
Baron Schwartz says:
I have always had a gut aversion to any kind of commissioned referral. If you're talking to me and we determine I'm not the right company to serve your needs, how much work is it to send an email with a couple of good friends that I trust and think could help? Maybe ten minutes of my time. So on that basis alone, I have never liked the idea. I also look at it this way: It should be about serving the (potential) customers. What if I imagine NOT serving them? "Sorry, I know just the person for you, but they won't pony up 10%, so I'm going to make you suffer." That's just wrong. I've recently redirected a huge job to a quasi-competitor, and I think I made friends with them both. Now, that's worth something.
Thanks for your thoughts, Baron. I agree that the commissions are greatly disproportionate to the effort, but I'm sure advocates would say it's like giving someone a treasure map: no effort, but lots of value. To be clear, the vendors in question aren't PPC agencies, they're vendors of other services (SEO, CSE, Email, Platforms, etc.) It's probably also true that those recommendations carry little weight precisely because they don't come from people who've actually used our services. The converse is also true: we think highly of certain vendors based on word of mouth and knowing the principals of the company. In most cases we don't have first hand knowledge of their business, so hopefully no one pays too much attention to what we say. I've always thought the key to finding a good vendor is finding knowledgeable customers of theirs who are happy. Having happy customers is easy, but pleasing the folks who really know their stuff really means something.
This is definitely a slippery slope, if you are familiar with the other company and know each others plan then I don't see a problem. However, many businesses have different beliefs and what your referral partner thinks is a good client not match up to what you offer. I think the process has to be looked at on a case by case basis.

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