Referrals are a common way for businesses to increase their customer base. Encouraging existing customers to refer their friends and family to purchase your products or services can be an effective way to grow your business without extensive marketing efforts. However, if you are planning to introduce a referral program into your business, ensure it is not considered ‘referral selling’. This is because referral selling is illegal under the Australian Consumer Law (ACL). This article will explain what referral selling is and how you can comply with the ACL when introducing a referral program into your business.
What is the Australian Consumer Law?
The ACL seeks to protect consumers (and businesses) and regulate transactions. Some of the ways the legislation does this are by:
- allowing a court to make unfair contract terms void;
- providing certain consumer guarantees to consumers for protection and assurance, such as that goods sold must be of acceptable quality;
- prohibiting businesses from engaging in misleading and deceptive conduct; and
- preventing unfair practices, such as referral selling.
What is Referral Selling?
Referral selling involves a business persuading a consumer to buy goods or services with the promise that they will receive a particular benefit, rebate or commission. The ACL sets out some situations when referral selling is illegal. This includes when a business sells goods or services by representing that the consumer will:
- receive a discount, commission or another benefit after completing the purchase; and
- only receive the promised benefit if the referrals provided lead to additional sales.
When a business uses this type of sales strategy, it often means that the consumer will pay an inflated price for the goods or services. The reason this kind of practice is illegal is because there is no assurance that such referred sales will materialise. There is also no certainty the consumer will receive the reward that they were expecting. 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 have played a “real” or “significant” role in inducing them to make the purchase.
Continue reading this article below the formWhen is Referral Selling Illegal?
In principle, the consumer should not be sold something on the basis that they will only receive a particular benefit if something else occurs. This is when referral selling may be illegal. Below, we set out some examples to show what illegal referral selling looks like:
- Imagine you own a gym, and it offers prospective customers a 25% rebate on their membership if they give the names and phone numbers of five friends who each take out a membership. This form of referral selling is illegal since the customer has no control over whether their friends make purchases, and you are enticing them to buy with a promise of a discount contingent on those referrals.
- If you make a sales pitch to a prospective customer and offer them part of your commission if they refer five family members or friends who become paying customers, this is referral selling. This example is considered illegal because the consumer is encouraged to make a purchase under the condition that they refer others who also make purchases.
- Imagine you run a mattress store and inform a potential buyer that they will receive a commission if they refer friends or family members who purchase the same mattress and join an exclusive ‘mattress club’. This form of referral selling is illegal as it links the consumer’s benefit to the actions of their referrals.
What are the Penalties for Referral Selling?
Be cautious when using referral selling as a sales tactic. You may find yourself the subject of penalties from the Australian Competition and Consumer Commission (ACCC). The penalties for referral selling include fines of up to $10 million for companies and $500,000 for individuals.
When is Referral Marketing Allowed?
Despite the restrictions on referral selling, there are situations where referral marketing can be a great marketing tool.
1. New and Existing Customers
Referral marketing is legal where you offer a referral benefit to a new or existing customer and you only request the names of prospective customers from that customer. In this case, you do not actually require that those referrals become paying customers.
In the online retail example above, it would be legal for that business to provide the customer with a $50 voucher for their next order simply for referring the names of some friends. There, the customer’s friends are not obliged to make a purchase.
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. However, that customer must be an existing customer.
For example, a gym can offer a client a benefit such as a free t-shirt if they refer a friend who actually signs up, as long as that individual is already an existing client.
To ensure compliance with the law, you must handle this type of promotion carefully and restrict communication to existing customers. Some measures you can implement to do so are:
- avoid promoting the referral scheme on public forums like your website;
- limit marketing emails to your existing customer base; and
- instruct your sales team not to promote the offer to any prospective customers whilst clarifying that it is exclusively available for existing customers.
As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.
Key Takeaways
As a business owner, a referral scheme can be an effective way of generating a wider customer base. However, you must be careful that you do not implement any illegal referral-selling tactics. You should not be providing prospective customers with a benefit on the condition that they refer you to other consumers, and those referrals also make a purchase from you. There are some situations where referral marketing is allowed, which include if you:
- provide a benefit to a customer solely to receive the names of referrals, but there is no condition that the referral purchases from you; or
- offer the referral promotion to existing customers only.
If you need help with a potential referral program, LegalVision’s marketing compliance lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Referral selling involves offering a benefit, rebate or commission to a consumer with the condition that they refer others who make a purchase. This practice is illegal under the Australian Consumer Law as it can lead to inflated prices and uncertain outcomes. On the other hand, referral marketing is allowed when you provide a benefit to customers solely for referring names of potential customers, without any requirement for those referrals to make a purchase.
Yes, you can offer referral benefits to existing customers under certain conditions. The Australian Consumer Law permits this type of referral marketing. For example, you can offer a benefit, such as a free t-shirt, to an existing gym member who successfully refers a friend who signs up. It is crucial to ensure that you restrict the promotion to existing customers and avoid sharing details with new customers. You can do this by not promoting the referral scheme publicly and by limiting marketing emails to existing customers.
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