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Referrals are a common way for businesses to increase their customer base. By offering your customers a reward to get their friends and family to buy your product or services, your customers can do the hard work for you to grow your business. You may be planning to introduce a referral program into your business. However, be careful to ensure that your referral program is not considered ‘referral selling’. This is because referral selling is illegal under the Australian Consumer Law. Below, we unpack what referral selling is and how you can introduce a legal referral program into your business.

What is the Australian Consumer Law?

The Australian Consumer Law seeks to protect consumers (and businesses) and regulate transactions. Some of the ways the legislation does this are by:

  • making unfair contract terms void;
  • providing certain consumer guarantees to consumers, for example, providing that goods sold must be of acceptable quality; 
  • stopping businesses from engaging in misleading and deceptive conduct and unconscionable 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 Australian Consumer Law sets out some situations when referral selling is illegal. This includes when a business sells goods or services by representing that:

  • a consumer will receive a discount, commission or another benefit after the purchase has been made; and
  • they will receive this benefit only if the referrals provided by the consumer results in further sales.

When a business uses this type of referral selling strategy, it often means that the consumer will pay an inflated price for the goods or services. The reason this kind of sales practice is illegal is because there is no assurance that such sales will eventuate. Also, there’s no guarantee 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 be a “real” or “significant” inducement.

When Is Referral Selling Illegal?

It is useful to set out some examples of what illegal referral selling looks like:

  1. An online retail company advertises that if you refer four friends and they each spend $50 on that website, the online shopping company will give you 25% off your next order.
  2. A mortgage broker, as part of their sales pitch to you as a prospective customer, tells you that if you refer five of your family or friends to the mortgage broker, you will receive a portion of the mortgage broker’s commission if those referrals become paying customers. 
  3. A mattress store tells you, as a prospective buyer, that you will receive a commission if you refer friends or family to them if those referrals purchase the same mattress as you and sign up to an exclusive ‘mattress club’ that you have to sign up to as well.

Referral selling was illegal in the above examples because in each case, the consumer could not control the outcome of future sales. Also, the consumer should not be sold something on the basis that they will only receive a particular benefit if something else occurs (i.e. their friends or family also making a purchase).

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. 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 if you offer a referral benefit to a new or existing customer if you only request the names of prospective customers from your customer. There should be no requirement that those referrals actually become paying customers.

For example, 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 (and not actually requiring the friends to make a purchase).

2. Existing Customers Only

The Australian Consumer Law 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 (e.g. a free t-shirt) if they refer a friend who actually signs up, as long as that individual is already an existing client. 

This exception only applies to existing customers. Therefore, you need to be careful not to share the details of this promotion with new customers. This can be achieved by:

  • not promoting the referral scheme in public forums such as on your website;
  • only sending marketing emails to your existing customers; and
  • ensuring your sales team does not promote this offer to any prospective customers. If someone asks about the promotion, you can mention that this is an offer for existing customers only.

Key Takeaways

Is your business is planning to introduce a referral scheme? 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 their friends and family 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
  • if you offer the referral promotion to existing customers 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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