Customer referral programs: how to reward referrals without breaking the rules

The short answer: reward customers after the job, and let them pass the word on

A recommendation from a happy customer is often the best enquiry a service business gets, so it makes sense to thank people who send work your way. Australian law doesn't stop you doing that. It does shape how you do it, and the two most common referral designs run straight into it.

The first is promising a reward as a reason to buy, where the customer only gets it if their friends buy later. The Australian Consumer Law calls that referral selling and prohibits it. The second is collecting friends' phone numbers or email addresses so your business can message them. The Spam Act needs consent from the person who receives a marketing message, and the regulator says a referral from someone else isn't that consent.

The design that avoids both is simple. Offer the reward to people who have already bought from you, give them something to pass on themselves, and wait for the friend to contact you.

Referral selling: a reward that depends on someone else buying

Section 49 of the Australian Consumer Law says a business must not "induce a consumer to acquire goods or services" by promising a rebate, commission or other benefit for supplying the names of prospective customers, or otherwise helping the business sell to others, "if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made." A pecuniary penalty can apply.

Three things have to come together: the promise is part of persuading someone to buy, the reward is for helping you reach other customers, and the reward depends on something that happens after they sign, usually other people buying. NSW Fair Trading gives the example of a gym that offers a new member a 25% rebate on a 12-month membership if she supplies the names and phone numbers of five friends and all five join. That is illegal.

Not every referral reward is caught. The official ACL guide to sales practices says it isn't referral selling to promise a benefit simply for providing names, where the benefit doesn't depend on anything else happening. Its example is a gift voucher for customers who name friends who might be interested, and it adds: "The gift voucher must not be offered on the condition that it will only be given to the consumer if one of their friends makes a purchase."

Because the section is about what persuades someone to buy, the lower-risk approach is to keep referral rewards out of your quotes and sales conversations altogether, and offer them to customers once their own job is done. If you want a reward to be part of the sale itself, get legal advice on the exact wording first.

Don't collect friends' details to market to them

Many referral tools ask the customer to type in a friend's email address or mobile number, then send that friend a discount code. That message is promoting your business, so it's a commercial electronic message. The Spam Act says a person must not "send, or cause to be sent" one without the consent of the account holder who receives it, and the friend hasn't given you any.

The ACMA's statement of expectations on consent is direct about this. In its list of practices that don't meet its expectations, it says: "Do not use refer-a-friend arrangements (consent must be given by the person to whom it applies)." Building a tell-a-friend form into your website doesn't move the responsibility to your customer either, because your system sends the message.

Privacy law points the same way. If your business is covered by the Privacy Act, Australian Privacy Principle 3.6 says you must collect personal information about an individual "only from the individual" unless that's unreasonable or impracticable. A list of friends' numbers supplied by someone else is exactly what that principle is designed to avoid, and you don't need it. If the friend wants your help, they can contact you.

Keep readingGet consent before you market to anyone

Tell your existing customers about it the right way

Telling customers about your referral program is marketing too. The ACMA says that where a message has more than one purpose, "if one of those purposes is to sell or promote goods or services, the message is commercial". A referral offer added to an invoice email, a booking confirmation or a job reminder can turn that service message into a marketing message.

So email or text the offer only to customers who have agreed to receive marketing from you, with your business identified and an unsubscribe option, as you would for any other promotion. For everyone else, mention it in person at the end of the job, or hand over a printed card. Neither of those is an electronic message.

Keep readingCheck when a customer message becomes marketing

A referral program you can explain in one paragraph

A referral program works best when the customer can explain it to a friend without checking the details. Write the terms down before you offer it, and keep them short enough to print on the back of a card. These are the decisions to make:

• Who can refer: existing customers whose own job is finished, not people you are still quoting.
• What they pass on: a personal code, a card with their name on it, or your phone number and website. Not a form for their friends' details.
• What counts as a referral: a new customer who names the referrer when they first contact you, so there's no argument later.
• When the reward is given: for example, once the friend's job is completed and paid. Put the timing in writing.
• What the reward is: a gift card, a voucher for a local business or a thank-you gift, with any limit per customer and an end date. A simple reward that isn't tied to buying more from you is easier to explain.
• What it isn't for: reviews. Keep the referral reward completely separate from any request for a review.

Keep referral rewards away from reviews

It's tempting to bundle the two: refer a friend or leave a review and get the same thank-you. Don't. Google's Maps policy says businesses must not offer incentives such as payment, discounts or free goods or services in exchange for posting a review, and that incentivised or biased reviews "are not allowed and will be removed from Maps."

Ask for reviews in the same plain way after every job, with no reward attached, and run the referral program as a separate thank-you for new customers. That keeps both of them clean.

Keep readingAsk for reviews without offering incentives

Track referrals as their own source

Referrals rarely show up properly in website analytics. A friend who types in your web address or searches your business name will usually look like a direct or branded search visit, not a referral. The only reliable way to know is to ask every new enquiry how they found you, and record the answer, plus any code or referrer's name, with the enquiry itself.

Once the source is recorded, you can see what the program is worth: how many referred enquiries came in, how many turned into paid jobs, and what you spent on rewards. Compare that with what the same number of jobs costs you from other sources, using your own records rather than a general rule of thumb.

Keep readingRecord where every enquiry came from

Worked example: an electrician rewrites a referral offer

This is a hypothetical example. The business and all figures are illustrative, not a real client or result.

A two-person electrical business in Ballarat adds a line to every quote: "Book with us and get $50 back for every friend who books within three months." Its quote form also has an optional field for friends' email addresses, and the website emails each friend a discount code. Both parts need changing. The $50 is promised as a reason to book and depends on other people booking later, which is the pattern section 49 describes. The emails go to people who never agreed to hear from the business.

The owners take the referral line off the quote and delete the friends' email field. At the end of each finished job, the electrician hands over two cards with the customer's surname printed as a code and the business's phone number. The card says the customer gets a $50 gift card when someone who quotes the code has their work completed and paid. Customers who have opted in to the business's emails also get a short note about it, with an unsubscribe link.

When a new caller quotes a code, the office records it in the enquiry record alongside the usual answer to how they found the business. After three months the owners can see how many referred enquiries arrived, how many became paid jobs and how much they spent on gift cards, and decide whether to keep the offer or change it.

A referral program checklist

Before you launch or change a referral offer, check it against this list:

• The reward isn't mentioned in quotes, proposals or sales calls as a reason to buy.
• Any reward that depends on a friend buying is only offered to customers whose own purchase is already complete.
• You don't collect friends' phone numbers or email addresses, and your website doesn't send messages to them.
• Emails or texts promoting the program go only to customers who have consented to marketing, with your business identified and an unsubscribe option.
• The terms are written down: who qualifies, what counts, what the reward is, when it's given and when the offer ends.
• The reward has nothing to do with reviews.
• Every new enquiry is asked how they found you, and referral codes are saved with the enquiry.
• If the reward is part of the sale itself, you've had the wording checked by a lawyer.