Referral Commission: How To Set Up a Referral Fee Plan

Referral commissions reward customers for recommending your brand to their friends and family. You may offer cash, store credit, discounts, or free products when a referral leads to a purchase.

These tangible rewards can turn satisfied buyers into brand advocates and help you find new customers while reducing reliance on more expensive customer acquisition strategies. Mattress company Polysleep has used this strategy, offering cash rewards when customers refer others. “Referral due to excitement of not only a great product, but also a positive experience can be leveraged in our industry to create that repeatability everybody’s seeking,” Polysleep cofounder and CEO Jeremiah Curvers says onShopify Masters.

What is a referral commission?

A referral commission is a payment from a business to a customer as a reward for encouraging someone they know to make a purchase. Businesses use referral commissions as part of word-of-mouth marketing strategies to incentivize high-quality referrals. These incentives may be one-time offers (such as a single reward to spark sales of a new product) or recurring rewards systems (where the original customer gets a payment or offer every time a referred customer makes a purchase).

Referral commissions can be structured as one-sided or two-sided. In a one-sided referral arrangement, only the referring customer receives a reward. In a two-sided structure, both the referring customer and the new customer receive an incentive. For example, apparel brand Tentree has a “Give 20%, Get $20” referral program where new customers receive a 20% discount on their first order, while the referring customer gets a $20 store credit.

By incentivizing your customers’ referral efforts, you can generate higher-quality leads and lower your customer acquisition cost (CAC). Gartner’s 2024 Customer Acquisition and Growth Primer shows that referrals bring in 43% more quality leads than other channels. According to CAC benchmarks from Phoenix Strategy Group, referral programs resulted in lower CAC than paid search, paid social, search engine optimization, and outbound sales.

People tend to trust recommendations from people they know. According to a GRIN study of more than 1,000 consumers, the most trustworthy sources for product recommendations are friends and family (40%). 

“Referral is just such a valuable channel,” Wild cofounder Charlie Bowes-Lyon says onShopify Masters. “Those people haven’t been sold to by us. They haven’t been sold to by an advert. They’ve been sold to by their friend who they trust.”

Referral commissions vs. affiliate commissions

Referral commissions differ from affiliate commissions. Unlike a referral commission, which is part of a program between a business and its existing customers, an affiliate commission usually involves partnerships with creators, influencers, or publications.

Common referral commission structures

• Flat fee
• Percentage of sale
• Tiered rewards
• Recurring

Businesses may set referral commissions based on product margins, customer acquisition costs, and average order value. Higher-margin or subscription-based businesses may be able to support larger payouts, while businesses with lower margins may rely on smaller commissions.

Here are some of the most common referral commission models used in ecommerce:

Flat fee

With a flat-fee commission, you encourage customers to make referrals by giving them a fixed reward when the referred customer completes a purchase. The commission amount remains the same regardless of the order value. 

A typical referral fee is either cash or store credit. Although cash may be more appealing to customers, store credit encourages repeat purchases and brings them back to your business.

Percentage of sale

In percentage commissions, you pay the referring customer a fixed percentage of their referral’s purchase value. For example, a business might offer customers 10% of a referred purchase, meaning a $300 order would generate a $30 commission.

Percentage-based commissions can work well for businesses with a wide range of price points because the payout scales alongside the order value. This helps you maintain a more consistent commission-to-revenue ratio across purchases. 

You can also cap the commission, offering a deal such as the chance to earn 10%, but only up to $50. Capped commissions can still motivate customers by highlighting the earning potential of larger purchases while helping you manage your costs.

Tiered rewards

With a tiered referral commission structure, your customers earn greater rewards as they generate more referrals. This approach is designed to encourage customers to keep sending referrals your way.

You may start with a small reward, such as a cash reward or store credit, for customers who make one or two referrals. You can then increase the commission amount, offer free products, or provide exclusive perks as customers reach higher referral milestones.

Polysleep has used a tiered rewards structure for those who drive new business their way. According to Jeremiah on Shopify Masters, the company has offered customers a $25 or $50 prepaid card when someone they refer buys a mattress. As customers continue to refer more people, they’re invited to join a more advanced referral program, where they receive a percentage of the sales they refer.

Tiered referral structures can work well for businesses with higher price points or longer purchase cycles because they can help maintain engagement even when repeat purchases are less common.

Recurring

A recurring referral commission strategy is commonly used by businesses with a subscription model. With this structure, customers continue earning commissions as long as the person they referred remains subscribed. You can offer either a fixed amount or a percentage of the subscription revenue generated by the referred customer. 

Best practices for paying referral commissions

• Use referral software to manage commission payouts
• Choose payout methods that fit your customers and operations
• Pay commissions after the return window closes
• Verify referrals before issuing payouts
• Set clear payout schedules
• Consider minimum payout thresholds

When paying referral commissions, businesses establish clear policies around payout timing, fraud prevention, and payment processing. Keep these best practices in mind: 

Use referral software to manage commission payouts

Referral software platforms can help you track successful referrals, process payments, and monitor commission activity while identifying suspicious behavior or duplicate accounts. Referral management tools—such as Referral Candy, Friendbuy, and Rivo—can help businesses track commissions, process payouts, and monitor referral activity. 

Choose payout methods that fit your customers and operations

Rewarding customers could involve cash payments, PayPal transfers, direct deposits, gift cards, or store credit. Some businesses prefer store credit or gift cards because they reduce payout costs while encouraging additional purchases.

Pay commissions after the return window closes

Waiting until a product’s return window has passed can help prevent situations where a referral commission is paid but then the referred customer returns the purchase. For example, if your return window lasts 30 days, you might delay commission payouts until day 31.

Verify referrals before issuing payouts

Some customers may attempt to refer themselves using alternate email addresses or duplicate accounts. Reviewing referral activity before paying commissions can help you reduce fraudulent payouts. Use referral apps that cross-check the shipping address, phone number, and/or payment method. Referral apps compare these details and also automatically check whether the referred customer’s IP address is unique.

Set clear payout schedules

Let customers know when referral commissions are issued, whether that’s monthly, quarterly, or after the return window closes. This can be included in your written eligibility guidelines/referral fee program terms. A referral fee agreement with clear timelines can help reduce confusion and customer support requests related to pending payments.

Consider minimum payout thresholds

Some businesses wait until customers earn a minimum commission amount before issuing payments. This can help reduce transaction fees and administrative overhead associated with processing very small amounts.