Paying commissions for referrals?

This is from a conversation we’re having in the forum. For context, Xochil is a pattern maker who has been asked to pay commissions by another party for work he sends to her. She asks (edited):

I am curious to see how others feel about either accepting or even requesting a commission or “finder’s fee” on making referrals to other businesses. For example, a pattern maker who refers their client to a sewing contractor and then gets a kick-back from the sewing contractor for the services rendered for that referral client. Do you do this, why or why not? What about a situation in which a client is referred them to Contractor A (who does pay commissions) even though Contractor B (who doesn’t) may be more suited to that type of product?

What if the referral were bad; from either the contractor’s perspective or the client/designer’s perspective? How would you handle this? How would the client feel if they knew you received the commission? I imagine people would not trust your referrals if they knew you got something in exchange.

I hesitated to post this because I had thought I needed to include my comments on the subject but at the same time, I didn’t want to color anyone’s responses either because I am very curious to hear what you all have to say. I decided to leave my opinion in comments instead. All I will say for now is that I know people do this but I never have. I have been asked by other parties who want to start a relationship, to pay referral fees but I don’t as a matter of policy. I don’t accept them either. Anyway, I’ll explain all my reasoning why in comments but would like to know what you think.

If you’re a designer, what would you think if you knew your pattern maker was having to pay a fee to the person who referred you to them and or, what would you think if someone were earning a percentage of the cost of your jobs? For service providers, I’d like to know if you do this and how it has worked out for you and your customers -do they know? Thanks!

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25 comments

  1. I freelanced (patterns/grading/markers/sample making) from 1988 through 2001. Recently I have started back.
    Referral fees – are not something I would ever consider (I know the dangers of saying “never”, but on this I am certain). I believe in working together with others in this business.
    I have gladly given referrals, especially to other pattern makers, my “competition” and the outcomes were relationships based on trust, respect, leading to long term friendships. The ‘feel good’ rewards were immediate. And sooner or later, I would benefit financially through counter-referrals and references.
    The other service remembered me, felt good about passing a potential client to me and knew I would not try to undermine them.
    I know just how important, and valuable, networking can be.

  2. Brenda says:

    How can I trust my pattern-maker (or any other vendor) if I knew the only reason they are pushing me towards another vendor is due to their kick-backs? I would be disappointed to find out she/he referred me to someone even though there is someone else out there better suited for my product. That would be the end of my relationship with the pattern-maker (in this case). I expect the pattern-maker (or any other vendor) to offer honest suggestions on how to improve my product in any way, not to push me to another vendor to make a quick buck. I expect people to live to a certain level of values especially when it comes to business, if they don’t they don’t care about their business to begin with.

  3. Trudy says:

    Never ever ever.

    If I refer someone, it’s because I trust them and their work; if someone is referred to me I assume the same thing. Kickbacks/backhanders just sully the whole deal, and cast a huge shadow of doubt on one’s integrity.

    Back in the mists of time, I would often refer bridal clients to other designers if they had more of what the Bride was looking for…this was usually reciprocated…what goes around, comes around, for good or ill.

    Happy Thanksgiving!

    Txxx

  4. Amy says:

    If the referral resulted in a sale or ongoing business, I think a one-time referral “thank you/finder’s fee” is acceptable. I wouldn’t ask for this, but I don’t think it’s inappropriate. I view it this way: they did networking legwork for you that might have taken you a long time to find on your own (or you may never have found on your own!) and were nice enough to share their connection–possibly even taking away some future business from themselves in the long run.

    I don’t know, in business dealings (especially in a larger playing field than just a one-on-one personal contact–such as selling boutique items to a shop) I imagine you just can’t expect that “feeeeelings” will come into play or even be taken into consideration. It’s business dollars, and really they provided a service that an agency handling this type of networking would expect. Note: I have no idea if agencies of this nature exist, but I imagine they do in this field.

  5. Kathy Jo says:

    I think it’s a bad idea and I certainly would not trust the referral if there was a fee paid for it, I think it taints the idea of why I trust referrals. I refer people all the time to others that do great work (not just in the industry) I like giving those that do a great job additional work. I believe that what comes around goes around, like this forum as a whole, I trust that people are giving me honest opinions, not to serve their bank account but to help the other. We all know that when you need a favor it’s good to have arleady filled the favor bank, if you want to charge for your favor expect to pay for the ones you ask for as well.

    I know everyone needs to make money but, I believe that if you do a great job you will be successful thus gaining referrals for free, I think your work should speak for itself. Having said that, if you were to say open an agency or you are a consultant that does only this, that would be different. I think when you add money to the mix if something goes wrong you’re level of involvement would be questioned and then do you give the referral back? See, too many problems. When I pay a consultant or an agency for specific information I know in my head what I’m gettting, but if I get a referral from a friend or colleague I think differently of the referral because I believe they are just passing the good along. I tend to think that if you make no money and you still are telling me about this person that actually sends a message itself.

    Happy Thanksgiving

  6. … That I know that a salesperson is getting a sales commission.

    If I am buying a used car from someone, I treat their input differently than ifKathleen is telling me that the best pattern maker for my needs is ____.

    … That a referral fee is moot.

    Professionals who respect one another’s work will refer work back and forth to one another. If they paid each other referral fees each time, then they might as well have a sealed envelope that they pass back and forth. A sales commission just goes one way. I buy your stuff, you get paid. You don’t then turn around and buy my stuff so that I get paid.

  7. Denise says:

    I’m sure a that someone receiving a kickback for a referral isn’t going to tell the DE (or whomever) about that part of it. A professional (in any field) hired for his or her skills and expertise would ruin his or her reputation with many if it was found out the ‘helpful advice’ offered was for his or her own financial gain. On the other hand, in the corporate world there are ‘preferred vendors’ and ‘partnerships’ both formal and informal, gained through determining that a resource or product best suits their need and/or relationship building by wining and dining, box seats at sporting events, weekend vacations at luxury resorts, someone has worked with/is a relative of/is in relationship with the other vendor/supplier and so on. Let’s face it, like it or not, this kind of ‘scratch my back..’ thing goes on all of the time.

    This goes back to Annie’s post “Everything I wish I knew when I started (Part 2)”: “Everyone has a motive. Make sure you know what everyone’s is” and “don’t let anyone stand between you and information.” As it is, you take your chances with every new business relationship, and if I found out that someone directed me to a source for his or her own gain, I would evaluate his or her opinion with this in mind. Sometimes it’s better as a DE to go out and find these sources for his or her own self anyway.

  8. Xochil says:

    It’s been interesting to read the different responses from people on this topic. Alison raised a point about knowing whether someone is paid on commission allows for her to treat a referral differently. Amy mentions the possibility of a referring agent. Which bring me to wonder, if the referrer is acting as an agent who openly represents multiple contractors, and refers the client to whichever is most suited for their project, is that more OK (vs. the pattern maker example)? Essentially they are selling the services of the contractors, much like the cars salesman example that Alison mentioned. Maybe car sales is a difficult comparison because not all car salesmen are considered honest, but they sell many different types of cars, and I would venture to believe they want to sell you the right car for you.

    Does the transparency of the operation matter to you?

    I like Denise’s comment, “sometimes it’s better as a DE to go out and find these sources for his or her own self anyway.” Even if someone does refer you to a service, it’s important to do your due diligence and evaluate if the referral is a good one for you. Even with the best intentions from all parties, not every referral is a good one.

  9. Jay says:

    Well this is certainly a tricky subject.

    I don’t want to sound defense. I may be however, one of the only people here that makes a living on nothing but commissions so my prospective is a bit different.

    All kinds of people in all kinds of fields have representatives that sell their services including your doctor and lawyer. Many times I have told the person on the other end of the transaction that I in fact received compensation and act as a salesman for a factory. In the same breath, I have also mentioned and provided information on service providers and factories that I do not receive compensation from.

    I can tell you from my own experience that factories in particular benefit from someone going out and peddling their services. Most of these places (at least in Chicago) are in a life and death struggle for survival and are happy to pay commissions. Factories are also as a rule, pretty terrible at handling potential clients coming in the door and having a look around. In fact, as many of you know, the first visit to a contractor is not always a pleasant or inviting experience.

    In this case, a sales person provides an important service and the “kickbacks” are well earned (In Chicago commissions are not well thought of but kickbacks are a venerable institution)

    So when I provide someone with the name of a company that makes organic cotton twill tape in custom colors, everybody in the transaction is pretty thrilled…..except me. Wayne Mills doesn’t pay me http://waynemills.com/

    Do pattern makers operate under a different system? So I think this is where we can draw a line between sales people and professional courtesy. I found Martin’s comments very interesting. I also refer customers to other fabric, trim, button and zipper sales people. I never take compensation for this. I also list one of my competitors on my website. While this generosity is met with a positive reaction, it is also met in some cases with shock!

    Happy Holidays

  10. Jay, I would never begrudge anyone their sales commission. Salespeople work hard and under great uncertainty. I have a corporate job, and while the salespeople are culturally different from those of us who are salaried (and therefore too easy to make fun of) they are the ones who pay our salaries.

    All the salespeople I know enjoy helping people. They like the process of matching someone who has a need with the solution to their need.

    The DEs here understand the importance of having a good sales rep, and they understand that it must take a special set of skills because they are so hard to find.

    Part of the issue of referral fees happens when someone getting paid in two ways. If Kathleen makes her living as a pattern maker and also takes referral fees, there could be a tension between different incentives. Kind of like as a salaried employee working in the procurement chain I would have been in a conflict of interest if I’d accepted gifts from our vendors.

  11. dosfashionistas says:

    This has been an interesting discussion. As a patternmaker I would have never taken a commission or referral fee to send someone to a contractor. I would have considered it unprofessional. As a DE, which I have been lately, I would not have a problem if anyone in the business guided me to a good contractor IF they let me know they were getting a fee for doing so.

    I have known of instances in the past where production managers seemed to be working for the contractors more than the company that paid their salary, so the dangers of kickbacks exists not only in outside referrals.

  12. Clara Rico says:

    I think the question is how does the referrer get the names of people to refer to. Does he send out queries as to who would be willing to pay a commission and those are the only ones on his referral list, or does he actually find out which of many options available is the best for each client?

  13. Tula says:

    Interesting. I work in software, primarily on a contract/consulting/freelance basis. Most staffing firms will pay me a referral fee if they put someone I referred to work. A lot of companies pay their employees the same type of fee when they hire a referral. Of course, these fees are larger and more common when there are plenty of jobs to be had and fewer people available to fill them.

    As an individual, I wouldn’t ask for a fee if it wasn’t already being offered. If part of my business was in putting others to work on contracts, though, then of course it would be a standard thing to request. So, I guess it’s dependent on the norms in the industry as to whether it’s done or not.

  14. Jane says:

    My oh my, this is a lively debate. I’m with Amy, I cannot wait for Kathleen’s two cents! And Tula has a good point, too. In our industry it doesn’t seem to be “the norm” and therefore is pretty distasteful for many folks.

    Here’s a post I read recently about this topic that sums it up well –

    “It’s not as simple as whether referral commissions are ‘wrong’. To an extent it probably depends on the product, but ultimately disclosure is the issue. If someone thinks that you’re referring them because the product is good, and it then transpires that you’re getting a ‘kickback’, of course – that doesn’t look good.

    But if you say something along the lines of, ‘I do get a commission for recommending these guys but I would recommend them *anyway* because they do good work’, then the referee is fully informed and there’s no damage to your reputation.”

    Food for thought.

  15. Kathleen says:

    Not ignoring anyone, if you didn’t catch my mention in the earlier post, we did moving all weekend. Still not done, this is the first time I’ve logged on in three days. I probably won’t get to this until tomorrow but if you have access to the forum, my previous comments on the subject are here. I do plan to elaborate on that with a whole bunch of boring econ stuff related to asymmetrical information etc. See ya!

  16. Chan says:

    I can’t believe I’ve stumbled onto this blog, it’s amazing! Never really seen anyone out there (online) writing about the industry with such openness, mainly because I thought everyone was just like me, working in isolation, being a loner, and not sleeping much.

    on the topic: I’m agreeing a lot with Alison. I think referrals should be a gesture of respect and recognition within a profession. You earn respect, yes? I’ve never bought or sold respect to anyone before.

    Even in sales! My brother works in retail and he has recommended another salesperson for a customer because he knew the other person would be more suited to that customers needs. My brother lost a chance at commission, but that’s better then lying to the customer and yourself about your selling abilities.

  17. Andrea says:

    I think in all professional communities, referrals are part and parcel of the trade. It’s great to be able to give a good referral and even better when a colleague trusts you enough to give you one. I agree with Chan, that kind of thing is cheapened when you have to buy it.

  18. More thoughts on the difference between a sales commission and a referral fee: It’s about clarity on who you’re working for.

    If you’re making your living off referrals, if you are being paid by referral fees then you should be working for an identified employer. Just as retail buyers know when they are dealing with a showroom rep with a selection of lines to meet their needs, DEs need to know the same thing when they are dealing with a contractor rep.

    Alternatively, you would be hired by the DE and paid by the DE only. The issue here is knowing how much to get paid. When you get a sales commission you get a percentage of the sale, so you’re motivated to make the sale and to make it as big as possible. Your motivation and your employers’ motivations are thus completely aligned.

    If you set a DE up with appropriate contractors and get a percentage of sales from the *DE,* that misaligns your motivations. The DE wants value for money and to spend as little money as reasonable; you want a big sale. So it’s not a good way for a DE to pay you.

    Charging a DE When a DE hires you to set them up with appropriate contractors, would you charge by the hour? A flat fee if a sale is made? This would seem to make most sense. It aligns your interests with the DEs (do business with the most appropriate suppliers) and you need to do your job well otherwise you don’t get paid. Is there a reason not to work this way?

  19. Marie-Christine says:

    I agree with Tula totally. If I’ve done a lot of work finding reliable people, perhaps at the cost of bitter personal experience, I don’t see why that should not be rewarded. A referral fee is usually less than would be an agency’s fee anyway, so I don’t think anyone is getting ripped off. And I’d like to add that I’ve spent the last 3 years getting half my pay skimmed by the agency that referred me to this job. It bites, but then again I’d never have gotten it without their help, so I put up with it. I’m even considering doing it again.

    All this ‘never, never, never’ brings to mind that you shouldn’t be naive and assume there are no referral fees in your dealings, just because you aren’t aware of them. The fee may be in kind, as in general goodwill and better relationships and counter-referrals, but it’s there. Don’t be fooled into thinking that everyone’s motivation in referrals is pure and disinterested, even those who ‘never’ here explain what they expect in return…

  20. Jay says:

    Not that I think it is totally applicable, but just ponder this.

    If you go and design your line and go and make it in say China, you are paying an agent. The agent gets say 5% of your orders so negotiating lower prices and smaller orders is not in the agent’s best interest. This is, however, how most of the buying works in the orient and elsewhere. The thought of a “free” referral in China is laughable. It just does not happen….never, never, never!

    At least some successful pattern makers are paid to steer business to a particular factory (I know of one such instance).

    A big thumbs up for the second paragraph of Marie-Christine’s post.

  21. Trudy says:

    Just to add to my previous post on this…there is a vast difference in a ‘free’ referral and a ‘paid’ recommendation…I’ve done factory-finding in the past, where I’d basically find contractors for a fee. But the fee part was clearly stated, up front, and I was working to a very specific brief, say, I needed a shop to produce X amount of Y garments within Z timeframe/budget etc. In these instances, it was my job to find what my client wanted, usually a choice of 3 or 4 options, for a pre-arranged fee. Maybe I’d suggest contractors I’d used before, maybe not, depends on the brief.

    So I stand by my ‘never, ever, ever’ comment on my first post, paid referrals are not my style, pre-arranged fees for a specific service-where everyone knows the score upfront-are fine by me.

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