Legal Definitions - referral sales contract

A referral sales contract is a specific type of agreement that involves two main parts:

• First, a consumer agrees to purchase goods or services, which are often priced higher than their market value.
• Second, the seller promises to compensate the consumer (for example, through a rebate, discount, or cash payment) for each new customer they refer to the seller. Crucially, this compensation is typically conditional on the referred individuals actually making a purchase themselves.

These contracts are often viewed with caution by legal authorities because their success relies on an ever-expanding pool of new customers, making them unsustainable in the long run. Many jurisdictions have laws prohibiting or strictly regulating referral sales schemes where the consumer's compensation depends on the referred person completing a purchase.

Here are some examples to illustrate a referral sales contract:

• Home Security System: Imagine a homeowner purchases a new, advanced home security system for $5,000, which is somewhat above the typical market price for similar systems. The sales representative tells the homeowner that for every neighbor they refer who also buys and installs the same security system, the homeowner will receive a $500 rebate on their initial purchase. The homeowner's rebate is entirely dependent on their neighbors actually signing up for the service.

  This illustrates a referral sales contract because the homeowner (consumer) buys a product (security system, potentially overpriced) and is promised compensation (rebate) by the seller, but only if their referrals become paying customers.

• High-End Water Filtration System: A consumer attends a home demonstration and decides to buy an expensive, multi-stage water filtration system for their kitchen, costing $3,000. The salesperson offers them a deal: if they provide a list of five friends or family members, and at least two of those individuals purchase the same system after a demonstration, the original consumer will receive a $600 cash bonus. If no one on the list buys, the consumer gets no bonus.

  This is an example of a referral sales contract because the consumer commits to buying a product (water filtration system) and is offered a financial incentive (cash bonus) that is contingent upon their referred contacts making actual purchases from the seller.

• Exclusive Educational Program: A parent enrolls their child in an exclusive, year-long online educational program that costs $10,000. The program administrator informs the parent that if they refer other parents whose children then enroll and pay for the program, the original parent will receive a 10% discount on their child's tuition for each successful referral. The discount is only applied once the referred child's enrollment is finalized and paid for.

  This demonstrates a referral sales contract as the parent (consumer) purchases a service (educational program) and is offered a benefit (tuition discount) by the seller, directly tied to the successful enrollment and payment of new customers they have referred.