Are Referral Incentives a Marketing Expense

Are Referral Incentives a Marketing Expense?

When it comes to advertising your business, you’re spoilt for choice. From newspapers and magazines to social media platforms and beyond to billboards and bus shelters, promotional potential is massive. Even if your budget isn’t quite so sizeable, there are still plenty of options for you to explore.

Some businesses also use referral incentives as part of their wider marketing strategy, rewarding clients who recommend them.

What are referral incentives?

A referral incentive is something you offer to an existing customer to encourage them to recommend your product or service to their network in exchange for a reward. This strategy turns your existing customers into brand advocates.

For example, you might reward them with:

  • Cash
  • Account credit
  • Gift vouchers
  • Lower fees
  • Money off
  • Points in a loyalty scheme

The reward you offer for recommendations depends on the type of referral programme you want to run.

Do referral incentives work?

Research by Nielsen reveals that recommendations from friends are one of the most reliable forms of advertising, with 83% allowing this to influence their purchases. The same research also found customers are four times more likely to buy something when a friend refers them.

A global marketing study carried out by Radius suggests that word-of-mouth is particularly powerful amongst millennials. This group placed word-of-mouth at the top of the list of what influences them when it comes to purchasing apparel, financial products, travel, electronics, and consumer packaged goods.

Is a referral incentive an allowable marketing expense?

Yes, referral incentives do qualify as an allowable expense in the eyes of HMRC.

They’re an essential cost to the running of the business, and can therefore be deducted from income, leaving you with the profits that you pay tax on. In short, including allowable expenses on your tax return means you pay less tax.

Other allowable marketing expenses might include:

  • Website costs, such as development, hosting, and domain name.
  • Print advertising
  • Mail shots
  • Free samples

Just be aware that entertainment and hospitality, on the other hand, are not allowable marketing expenses because they’re not business critical.

How to record referral incentives for accounting purposes

You’ll need to document the referral incentives you issue as part of your regular bookkeeping process.

Experts at The Accountancy Partnership recommend that the best way to do this is by setting up a new expenses category specifically for referral fees. That way you can clearly see what they cost you (so you can check it’s worth it!), as well as making it easier to claim everything back later. It’s just another reason why accountants are so keen on good bookkeeping!

Advice on managing a referral programme

Not sure whether you should be considering running a referral programme? Here’s some advice to consider:

Set clear goals around what you want to achieve

Are you looking to accelerate business growth? Perhaps you want to supercharge revenue? Maybe you’re searching for ways to improve customer retention? Whatever your goal might be, make sure this is explicitly clear. It might affect what sort of incentive you offer, and who you offer it to.

Regularly report and review progress

It’s essential to take stock of where you’re at on a regular basis, so that you can see what’s performing well and what’s not. That way, you can adjust your strategy moving forward.

Set up some sort of tracking so that you can see the progress and success of each referral incentive. This can be done through your customer relationship manager (CRM) and by using unique referral links or coded URLs.

It will also help you understand what a new customer is worth in comparison to the referral costs incurred to engage them in the first place.

Involve your accountant in the process

Whenever money coming in or out is involved, it’s always a good idea to ensure your accountant is kept in the loop. Where referral incentives are concerned, they’ll be able to advise on what kind of reward is affordable and also make sure you remain tax-efficient and compliant in the process.

Show your appreciation

Okay, so, a customer might be getting a nice little reward for any recommendations they make but still, it’s polite to show your gratitude for their efforts. Contact your referees to say thank you – it’s a small gesture that will have a big impact.

Are referral incentives the same as affiliate marketing?

It’s easy to see how referrals and affiliate marketing can be confused or used interchangeably because both use incentives to drive new customer engagement. However, when it comes to strategy and management, the two are quite different.

The main difference is the audience who drives this new engagement. While referral incentives call upon existing customers to entice their friends, family, and contacts to purchase your product or service, affiliate marketing campaigns rely on third-party activity.

This third-party comes in the form of brand advocates who are paid a fee to drum up business for you. Normally, the brand advocate will be paid in commission, which comes from a percentage of each sale they directly motivate. This commission is something that can be agreed upon between you and any affiliate you deploy. Yep, this is how influencers make money!

Although it is a different form of marketing from referral incentives, the fees attached to any affiliate campaign you run will also be classed as an allowable expense.

Find more help in our guides and faqs, or ask a tax question for free!

Lena
I'm a Marketing Executive with a passion for all things creative and design. I graduated from Chester University in 2019 with a first class degree in Illustration with Animation.