What is Referral Selling

Jan 13, 2017 | Commercial Contracts

Referral selling is when a business persuades a customer to buy from them by offering them a discount, rebate, commission or other benefit for providing the details of other potential customers (for example their friends). However in order to receive the benefit, the customer and the friends they referred must make a purchase from the business. This practice is illegal in Australia.

Let’s break it down. There are three elements to illegal referral selling:

  1. Customer A is promised a benefit for giving details of other potential customers (customers B, C and D)
  2. Customer A must make a purchase before they will receive the benefit
  3. Customer B, C or D must also make a purchase from the company for Customer A to receive the benefit

On the other hand, it is not illegal if the customer receives the benefit just for providing the contact details of potential customers, i.e. Customer A provides details of Customer B, C and D and gets a benefit and it does not matter if Customer B, C and/or D make a purchase.

Example of illegal referral selling

  1. Dean wants to buy an online media subscription service. He finds a potential company to sign up to. They offer access to movies, music and podcasts for a monthly fee.
  2. He goes onto the website to look at their various subscription plans and a screen pops up, asking him to enter the email addresses of his friends. It says that for each friend that signs up to this service, he will get one month of free subscription.
  3. He thinks this is a good deal, so he enters the email addresses of five of his friends that he thinks would like this company’s service. Dean then enters his payment details for the service and waits to see if he receives any months of free subscription. Unfortunately, he never receives a month of free subscription because none of his friends sign up.
  4. This practice is illegal in Australia.

Why is it illegal?

Referral selling is illegal because the Australian Consumer Law considers it to be unfair business dealing. This is because the customer (Dean) has gone to the effort of helping the business expand its customer base by providing contact details of other people (i.e. Dean’s friends) but they (i.e. Dean) may never receive the promised benefit.

What about referral agreements?

Illegal referral selling is different from legitimate referral agreements where one party pays another party to refer clients or customers to them or both parties refer

clients to each other. Referral agreements are a mutually beneficial relationship. One business gets the benefit of new customers and the other business benefits when they are able to refer their customers on to another trustworthy business.

A final point for businesses to consider

There are serious penalties for illegal referral selling. Companies can be fined up to $1.1 million and individuals can be fined up to $220 000.

You need to make sure that any referral arrangement you have in place is legitimate. This could be by offering customers a benefit simply for providing the contact details of other potential customers. Alternatively, you could find businesses that offer compatible products or services to your business and seek to create a referral agreement with them.

Clear as mud? We hope so. If you have any questions just let us know. We are happy to help.

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