How Much Should You Pay Referral Partners?

Setting the right commission rate is one of the most important decisions you'll make when launching a referral program. Pay too little and nobody will bother sharing. Pay too much and your margins disappear.

Here's how to find the sweet spot.

The Two Commission Models

Percentage of Revenue

You pay a percentage of each sale attributed to the referrer. This is the most common model for ongoing services.

Best for: Recurring revenue businesses, premium services, variable pricing

Example: A hair salon charges $80-$200 per visit. A 15% commission means $12-$30 per referred appointment.

Pros:

• Scales naturally with service pricing
• Higher-value services generate higher rewards
• Fair for both you and the referrer

Cons:

• Revenue varies by service, making rewards unpredictable
• Requires accurate payment tracking

Fixed Amount Per Conversion

You pay a flat dollar amount for each referred customer who makes a purchase.

Best for: Standardized pricing, simple reward structures, gift card programs

Example: A fitness studio pays $25 for every new member referred, regardless of which membership they choose.

Pros:

• Simple to understand and communicate
• Predictable costs for your business
• Easy to promote ("Earn $25 for every friend you refer!")

Cons:

• Doesn't scale with high-value conversions
• May over-reward for low-value purchases

Benchmarks by Industry

Here are typical commission rates for service businesses:

These are starting points. Your ideal rate depends on your profit margins, customer lifetime value, and local competition.

The Lifetime Value Formula

The single most important number for setting commission rates is customer lifetime value (CLV). Here's the simple formula:

CLV = Average Visit Value x Visits Per Year x Average Customer Lifespan

For a salon:

• Average visit: $100
• Visits per year: 8
• Average lifespan: 3 years
• CLV = $100 x 8 x 3 = $2,400

If a customer is worth $2,400, paying $25-$50 to acquire them is a no-brainer. That's a 1-2% acquisition cost, far cheaper than any advertising channel.

Tiered Commission Rates

As your program grows, consider tiered commissions to reward your best referrers:

• Standard: 10% for all affiliates
• Silver: 15% after 5 conversions
• Gold: 20% after 20 conversions
• VIP: 25% for your top performers

Tiered rates motivate active referrers to keep going while keeping costs low for casual referrers.

Double-Sided Rewards

The most effective referral programs reward both the referrer and the referred customer:

• Referrer: Gets a gift card top-up when their referral makes a purchase
• New customer: Gets a welcome gift card when they sign up via the referral link

Double-sided rewards increase conversion rates because the referred customer has an incentive to follow through on the referral.

Example structure:

• New customer receives: $15 gift card
• Referrer earns: $20 gift card top-up on first purchase

Gift Cards vs Cash Payouts

For service businesses, gift card rewards are almost always better than cash:

1. Money stays in your business. Gift cards are redeemed at your shop
2. No PayPal or Venmo needed. Rewards go straight to Square gift cards
3. Higher perceived value. A $20 gift card feels more generous than $20 cash
4. Guaranteed return visit. The referrer has to come back to use it
5. Tax simplicity. Gift cards are typically not reportable as income for recipients

Starting Point Recommendation

If you're not sure where to start, here's a safe default:

• Commission: 15% of revenue (percentage) or $20 fixed
• New customer welcome: $15 gift card
• Referrer reward: $20 gift card (on first purchase)
• Review after 30 days. Adjust based on referral volume and profitability

You can always increase rates later if referral volume is too low, or add tiers if certain affiliates are outperforming.

Common Mistakes

1. Setting rates too low. A $5 reward doesn't motivate anyone. Be generous enough to create action.
2. Making it complicated. "Earn 12.5% on the first $200, then 8% thereafter" is confusing. Keep it simple.
3. Not tracking ROI. If you can't measure what referrals are costing vs bringing in, you're guessing.
4. One-size-fits-all forever. Different affiliate types (stylists, clients, influencers) may deserve different rates. Use groups and tiers.
5. Delaying rewards. Issue rewards immediately. Delayed gratification kills referral momentum.