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Using a referral benefits promotion is a great marketing strategy to build your customer base. It involves offering customers a benefit in exchange for client referrals. For example, you might own a gym and offer a reduction on monthly membership fees in exchange for customer referrals.
However, it is important to be aware of the restrictions on referral selling. In many circumstances, referral selling is illegal under the Australian Consumer Law (ACL). However, there are some circumstances which are not captured by this ban. In this article, we discuss referral selling and how to avoid engaging in unlawful referral selling practices.
When is Referral Selling Illegal?
The ACL states that a business must not induce a consumer to use their services by promising referral benefits to the consumer if they provide other prospective customers to engage those services.
In other words, unlawful referral selling occurs if the customer receives the promised benefit only if the referred customers obtain or sign up for those goods or service. For example, Sam may sign up with a gym because the gym offers him a discount on membership fees if he refers a friend. If Sam only gets the discount if the friend signs up too, the gym will have engaged in illegal referral selling.
However, the promised referral benefit does not need to be the only or main reason why a customer buys the goods or services. It simply needs to be a “real” or “significant” inducement.
Note: You can be fined up to $1.1 million (for a body corporate) or $220,000 (for an individual) if you engage in illegal referral selling.
When is Referral Selling Allowed?
1. New or Existing Customers
The ACL does not stop you from offering referral benefits to new or existing customers if:
- you only require them to provide names of prospective customers; and
- there is no requirement that those referrals actually become your customers.
Therefore, in the gym example above, it would be legal for the gym to give Sam the referral benefit discount simply because he referred a friend (regardless of whether the friend joined up or not).
Note: If a customer’s decision to sign up for your service was not influenced by the prospect of getting the benefit, you will not be breaching the ACL.
2. Existing Customers Only
The ACL does allow you to offer a benefit to a customer if they refer a friend who successfully signs up for your product or service, but that customer must be an existing customer. For example, the gym can offer Sam a benefit (e.g. a free personal training session) if he refers a friend who actually signs up, as long as Sam is already an existing client.
In these cases, make sure the benefit offer is only advertised to existing clients. Therefore, avoid referring to the offer on your website where anyone is free to view it. Instead, contact your existing clients directly to offer them the deal. Additionally, make sure your staff or sales team do not tell people about the offer before they are clients. If a potential customer asks about the benefit offer before becoming your client, explain that:
- the offer is only available to existing clients; and
- you are unable to discuss the details of that offer further.
Key Takeaways
The ACL prohibits referral selling except in two specific circumstances. If you wish to make a referral benefit offer in order to grow your business, you may do so only if you offer the benefit to:
- new or existing clients for providing names of prospective clients (regardless of whether those referrals engage your company’s services); or
- existing clients only.
If you need help crafting a referral benefits scheme as part of your marketing strategy, contact LegalVision’s marketing compliance lawyers on 1300 544 755 or fill out the form on this page.
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