This week I'm a little hot under the collar. I got a great question from Mike about something I find myself very passionate about.
I have some pretty strong opinions about referral fees, kickbacks, commissions, etc. So buckle up! :)
I think that the place to start is with your pricing strategy. Are you priced so that you can afford to offer these discounts / incentives / commissions / etc.? For instance, if you want to charge $100 per table but offer a 10% option to a planner, are you happy with only getting $90 per table? Or should you price it at $110 and offer it to the planner at $99? Whichever way you choose, make sure that the lowest price you offer is still one that you’re happy with. Otherwise, any type of discount will eventually lead to resentment.
The second thing I think you should consider is why you’re offering a discount or incentive in the first place. Are you trying to encourage the planner to use you instead of your competition? Do you prefer working with planners instead of end-users? Does the planner make your life easier? Does working with a planner reduce your marketing costs? Is it just “industry standard” so you have to do it?
Now this is where I get up on my soap box. I’m all for professional courtesy and helping out your industry peers but I want you to be thoughtful about it. If you offer a blanket 10% (or 5% or 13% or whatever) discount to planners, is it bringing you more business? If all of your competitors do the same, is it actually effective? Is a kickback really how you want to differentiate yourself anyway?
I think that incentives, discounts, and promotions should be used sparingly to get people to do what you want them to do when you want them to do it. If you plan to have $300,000 in revenue, a 10% discount would be $30,000. How could you used that $30K most effectively to get the highest return?
Would it be more effective (aka bring you more business and more of the kind of business you want) to hold off on that blanket discount in order to use that power in another way. For instance, perhaps you don’t offer a discount to all planners but you tell them that you offer gift certificates at the end of the year to professionals who use you frequently (refer more than $X per year). They can use those credits for their own personal events or gift them to future clients.
Or, another strategy would be to have a “planners-only special” where you send an email that offers 20% off all orders booked by such-and-such date. That might have more impact (they act because it is a larger percentage off AND it gets you the cash when you want it). I also like that a promotion like this has an end date. If it works, you can repeat it in the future. If it doesn’t work, you can try something else. A blanket industry discount/kickback leaves you with a policy for perpetuity. If it is ineffective, it is difficult to change because you’ve already set expectations.
If you did offer a discount (like you mentioned you do now), you could tell the planner that if they are your client, you’ll offer the discount but if the bride herself is your client, you won’t offer the discount. This puts the responsibility on the planner to sign your contract, pay for the order, etc. If she wants to mark it up to resell to her client, that’s her own business. No skin off your nose. This might make sense if the idea is that working with the planner is more efficient (aka less costly for you). But if the bride is still involved or if the planner isn’t really professional, it may not save you any work in the long run. In fact, it may create a game of telephone that actually increases your workload.
In addition to the fact that you may resent offering a blanket discount or incentive and it might not leave you with the power or margin to offer other specials and incentives, I think it becomes an accounting nightmare.
If you start cutting checks, things get pretty sticky as well. For instance, say you have an order for $1000 and you plan to send the coordinator $100. When do you do that? After the initial deposit? After the job is completed? Are you including delivery, styling, or other fees when factoring the kickback? If not, how are you explaining this clearly to the planner ahead of time? If they are expecting $150 instead of $100, the would-be incentive might feel like a let-down to them. You’ll also want to consider how the commission works if there are damages on the order. Is that a factor? Or does that not come into play?
Another issue that I’ve seen be problematic is who gets the check. For instance, if you have a bride call you and tell you that her venue and her planner referred her to you, who do you send the money to? Do you pick one? Do you split it? Do you offer them both 10% (now you’re down 20%)? What is fair? How do you explain it to the referral source? If a bride has a planner but found you on her own through Instagram, do you still send the check to the planner? What are your rules for who gets a check when?
You asked if writing checks is legal. You’ll certainly want to double-check in your own state but my understanding is that it is legal. If you pay out more than $600 to a specific person, however, you’ll need to send them a W-9 at the end of the year. The process of distributing 1099s, collecting the appropriate info, and sending W-9s could be time-consuming and costly for you.
As you can see, I’m fairly opposed to the practice of blanket industry discounts or referral fees/commission/kickbacks. I think you could use that same amount of money (10% of your revenues) to do more to move people. Incentives are a huge lever in your business. I just don’t want to see you give away that power.
If you do decide to offer a discount policy or a referral program, make it great! Create an exclusive club for them to join or make a "platinum status" available only to planners. I would encourage you to have a clearly defined policy. It should also be something that you are transparent about (maybe even have on your website). In order for it to not feel icky or under-handed (especially to your end client), you don’t want it to be a secret. You also want to leverage it to get more business from planners and venues. Don't hide it, make it attractive and something people want to get in on.
Here are the issues your policy should address:
- Are you offering a discount or payment back?
- When is it issued?
- Who is eligible?
- Is there an end date or timeframe?
- Is there a minimum order required to receive the incentive?
- Does the planner / referral source have to apply for this program or are they automatically eligible? Are there requirements (business license, seller’s permit, etc.) or as long as they call themselves a planner / florist / venue / photographer, they are eligible?
- Is the planner required to do anything as a result of being part of the program (e.g. Instagram the event with a mention of your business, refer you first before your competitors, etc.)? What happens if they don’t fulfill their obligation?
- How can you make it feel exclusive or like someone is getting an insider's perk? What can you do to make the incentive program enticing to join?
I’m sure this sounds like a long-winded answer to your simple question. I think it is a can of worms that needs to be thoughtfully considered. Thanks for asking my opinion. I hope you find this helpful as you figure out what is right for you and your business.