Higher Payouts and More Referrals VS. Safety Net - A look at paying for referrals

[Kusanagi]

Edited/Updated 11-08-08

A while back in another thread I posted, I had mentioned the fact that it was a bad thing users were needing to drive up the amount that they offered to get referrals. It sparked a huge debate. I was accused of being greedy, of being selfish, and being negative.

True, it seems that anyone that voices an opinion that users are paying too much seems to be labeled as whining and greedy because their business is being stolen out from under them.

This couldn't be farther from the truth!

However, given that there was alot of positive feedback to the thread, others asked me to expand on a few of the things I touched on further. That's why I'm posting this.

Using math, I'm going to explain why a higher payout has the potential to really damage you in the long run.

"What should I pay for referrals?"

Now, the shortest answer to this is whatever you want. There is no set formula with how much to pay - everyone has their own system, and tweak it to work.

Nobody can make that decision for you, but I hope this thread will help point you in the direction of making an informed decision. I believe that whatever you choose, if you see what it can do and know why these things work the way they do, you're going to be a much better trader for it, and can turn this into a very lucrative side business.

Onward!

In my opinion, there are two things that should drive people when it comes to paying for referrals, and the amount you pay for them.

The first is profit, I won't lie, but after doing this for a while, if I can turn any money doing it, I'm happy. I've already made back far more than I put into freebie trading, so anything is good for me.

So, if that's the case, and you don't care what you make as long as you make something, why all this stink about people offering huge percentages of their payouts? Shouldn't you offer whatever it takes to get referrals, especially with the market saturation these days?

Most new traders will say yes, myself and other traders that have been around a while will say no.

The reason for this is something that has been mentioned on the forum but I haven't seen it fully explored - the second factor I think about when paying for greens, and a very important concept - the safety net.

This post kind of gets intense in the math, but it's important to see the numbers, and ultimately, why higher payouts have a better chance of harming you than being patient and waiting on referrals.

This post by me will be two parts - the first one consists of 3 sections that discuss competition between two traders (nobody specific on the forum, just a generic scenario.) The second part will go into this safety net, and how important it is if you want to actually make money doing this beyond the relatively small amount you make greening for others (when compared to how much you can make actually paying for referrals.)

In general, after discussions I've seen, this is a list I've compiled of pros and cons for each system:

High Payouts: - Pros and Cons

• More trades and referrals as people are drawn to the higher payout
• Able to cash out on the site sooner
• Gives a competitive edge against other traders
  
• Less profit per referral
• Higher chance of getting hit by scammers
• Recovering from a scammer takes much longer

Low Payouts: - Pros and Cons

• More profit per referral
• Less of a chance to be hit by scammers
• Recovering from a scammer can be relatively quick
  
• Less trades and referrals, as users won't be attracted to the lower payout over the higher one
• Can take a long time to cash out on the site you're working on
  

From this list, I see four main factors that should be considered:

1. Competitive Edge
2. Profit
3. Time to complete the site
4. Safety Net

The best way to build on these concepts is to have an example scenario that people can follow along with and relate to.

Meet two traders: Bob and Chris. Each one is promoting the same site, which is worth $100 per referral. They'll even pick the same prize, $800 via Paypal. Bob and Chris have different approaches to trading - Bob pays less, and gets less referrals. Chris pays more, and gets more referrals because of it. Here's a handy table to lay it out:

Our example situation

Now, I realize it is never this cut and dry, but this will illustrate the concept, trust me.

To make the numbers nice and even, let's have the two of them trade head to head and compare how they do.

Comparison 1: Competitive Edge

In the situation, Chris is getting more referrals than Bob, because of the higher payout he's giving.

Winner: Chris

Comparison 2: Profit

The simple formula to figure out profit is thus:

Profit = Prize Value - (# of referrals x amount paid per referral)

Bob pays his 8 referrals $50 each. Putting his numbers into the formula, and breaking it down with basic math, we end up with the following:

Profit = $800 - (8 referrals x $50 per referral)
Profit = $800 - $400
Profit = $400

Each referral = $50 profit

Putting Chris into the equation, it breaks down like this:

Profit = $800 - (8 referrals x $80 per referral)
Profit = $800 - $640
Profit = $160

Each referral = $20 profit

We can see that Bob made much more than Chris when it came to cashing out on the site one time.

Winner: Bob

Comparison 3: Time needed to cash out

Here's where Chris gets ahead of Bob.

This is also something to consider - how quickly do you want to cash out on the site and actually make your money?

Take the situation in the scenario above, and run it for 12 weeks. Here's what happens.

Bob gets 24 referrals, while Chris gets a whopping 72. Because each cashout costs 8 referrals, this means Bob can cash out on the site 3 times, while Chris can cash out an astounding 9 times. So how much is that worth?

We already figured out what the Profit Per Referral was in the last segment. For Bob, it's $50, and for Chris, it's $20. Ideally, if every green is used to cash out on, we can just basically say that:

Ideal Profit = Profit Per Referral x # of Referrals

For Bob, we end up with:

Ideal Profit = $50 x 24 referrals
Ideal Profit = $1200

Chris beats Bob with this little doozy:

Ideal Profit = $20 x 72 referrals
Ideal Profit = $1440!!

Chris beats Bob in our 12 week scenario, even with paying higher rates than anyone else!

Winner: Chris

So, right now, Chris leads Bob 2 to 1. He pays more, gets more referrals, and gets more money in the 12 week run. Seems like a done deal, right?

Not even close. We haven't looked at the 4th comparison - the safety net, and its purpose.

[Kusanagi]

So, given the above in the first post: "Why the heck would I pay less if it makes me less money!? You just proved that by paying more, you get more greens and make more money!"

You're right. If things worked out perfectly in the scenario listed, then we'd have no problems, and nobody would mind paying the higher amount.

However, nothing is perfect. We didn't factor in the possibilities of scammers.

No matter how many safeguards you have in place, no matter how careful you are, no matter how long you've done this, no matter what your "gut" tells you - it will happen. Sooner or later, you will get hit by a scammer.

This is where the "safety net" comes into play, and why it's one of the most important things to think about when it comes to trading.

Comparison 4 - The Safety Net

There's a reason why I called the total amount you made the ideal profit.

How does scamming affect the previous example?

To answer this question, we're going to modify the original scenario slightly.

Changed, accounting for scammers, and cashing out each referral for maximum profit

Bob and Chris don't change their tactics at all - they remain the same.

Every business has loss and theft drive down their bottom line and freebie trading is no different. To sum it up, if you have fewer profits, you'll take longer to recover from being hit by a scammer. If a user turns out to be a scammer - how many new greens do you have to bring in to make enough profit to cancel out their red?

*From this point on, I will refer to a scammer as a red. I know not all reds are scammers, but to me, a true red is someone who does not refund your money, bottom line.

The amount that one red costs you, compared to how many greens needed to cancel it out:

Looking at this table, Bob only needs to find 1 more referral to replace the profit lost by a red user. This is relatively easy to do, and works well with a lower payout.

But Chris needs to find 4 more greens to make up the one red! And if 1 out of every 8 is red, there's only a 50% chance that all the new referrals will be greens and not have a red somewhere in there!

It's already hard enough to find new greens, would you rather have to find one or four?

Remember our 12 week scenario? Let's go back to that, and run the numbers to find out exactly how this affects a long term trader.

Bob's Numbers: Lower Payout, Less Referrals, Bigger Safety Net

Going back to the original 12 week scenario, if no scammers had been involved, Bob would have made $1200 and Chris would have made $1440. I call this number the ideal profit.This number is found by multiplying the number of total referrals (green and red) by the amount you profit per referral.

Since the profit won't be ideal, we need to find out how much reds have cost us. This is called the loss, and is found by taking the # of reds and multiplying it by the amount you paid per referral. Here's the formula:

Ideal Profit - Loss = Actual Profit

From the revised example above, over the course of 12 weeks we know that Bob had 24 referrals, at $50 profit per referral. So now we know the ideal profit.

(24 x $50) - Loss = Actual Profit

If one out of every 8 referrals go red, we know the loss is 3 reds, at $50 loss per red.

(24 x $50) - (3 x $50) = Actual Profit

So what was Bob's actual profit?

$1200 - $150 = $1050

Even being hit by scammers, Bob still made over 1k. That's a pretty big safety net, wouldn't you say?

Chris' Numbers: Higher Payouts, More Referrals, Small Safety Net

So how is Chris doing now?

Ideal Profit - Loss = Actual Profit

Over that same 12 weeks we know that Chris had 72 referrals, at $20 profit per referral. So now we know the ideal profit.

(72 x $20) - Loss = Actual Profit

If one out of every 8 referrals go red, we know the loss is 9 reds this time, with a hefty $80 loss per red.

(72 x $20) - (9 x $80) = Actual Profit

So what was Chris' actual profit?

$1440 - $720 = $720!

Yikes! Even though Chris had three times as many greens as Bob, Bob still made over $300 more than Chris.


This concept is the "safety net." A proper safety net maximizes your profits, while minimizing your losses.

Unfortunately, it only gets worse for Chris.

Remember earlier in the pros and cons section? Scammers will not waste nearly as much time with the "small" payouts - they'll hit a few high payers, then split.

Chris is already making less money than Bob in the long run, and that's with the same ratio of red users to green users!

The truth is that scammers will be targeting Chris much more frequently - because of his higher payouts.

Here's a table that shows what would happens when you have more scammers enter the picture. Would you rather be Bob, or Chris in the following scenarios? Feel free to run the numbers yourself, if you don't trust my math

Things get worse for Chris, the more reds he attracts

Winner: Bob

In fact, the only way Chris would make more money than Bob is if Chris was hit by less than three scammers. Find any trader out there that has had 72 successful trades - and been scammed less than 3 times. I'll save you the trouble - you won't.

Bob sits back, counts his cash, and Chris is left asking the question:

"Why am I making so much less than Bob when I'm offering to pay more? Why is the lower paying person making more money at it than I am?"

If you've ever wondered why new users who jump the fence too soon, and offer high payouts in desparation for greens just vanish, this is the reason. They had no safety net, and got cleaned out by a scammer.

In Conclusion:

The bottom line is this: Nobody can tell you how much to pay for your referrals. You need to find a good balance between offering higher payouts to compete against other traders and maximizing your profit by minimizing your losses.

Is it easy? No. But with these formulas I've presented, you should be able to make it alot easier on yourself, and educate yourself to succeed in the freebie world, if you want to take it past the level of greening for other people.

I hope this thread clarified my reasoning behind why offering a high amount for greens just for business can be a bad thing. It was not based on greed, but on the concepts presented here.

Hopefully, this information lays it out. I can't present it any simpler than I have.

If you made it this far, thanks for reading! Let me know what you think.

[rookie75]

Great presentation, thank you for putting this together, it makes perfect sense.

[tm121]

I just skimmed thru your posts, but I love your arguments and how you back them up with specific math examples. I haven't started paying for referrals yet, but I'd like a plan in place when I do. You're probably right that offering reasonable pay for greens is best overall. But I've noticed on a lot of sites that their cash prizes go up for some referrals. For instance, a monster.net site offers $120 for 3 R's ($40/R), but $250 for 6 R's. So the first 5 R's are worth an average of $40, but that magic 6th R is worth $50. After you've earned 5 R's, go ahead and raise your payout for that valuable 6th R.

The best example I've seen of this is a TRAINN site that offers $490 for 10 R's ($49/R). Another prize is worth $580 for 11 R's. So that 11th R is worth an incredible $90, almost twice the average! You can offer a fortune for that one. You should only offer high payouts once in a while, when you're about to close out a prize where that last referral is worth more than average. That should keep scammers from targeting you, and one of the legit traders is probably more likely to stumble across your good deal and offer to green for you than one of the scammers. This is all theory from a newbie; let me know what you think.

[Kusanagi]

Originally Posted by tm121

I just skimmed thru your posts, but I love your arguments and how you back them up with specific math examples. I haven't started paying for referrals yet, but I'd like a plan in place when I do. You're probably right that offering reasonable pay for greens is best overall. But I've noticed on a lot of sites that their cash prizes go up for some referrals. For instance, a monster.net site offers $120 for 3 R's ($40/R), but $250 for 6 R's. So the first 5 R's are worth an average of $40, but that magic 6th R is worth $50. After you've earned 5 R's, go ahead and raise your payout for that valuable 6th R.

The best example I've seen of this is a TRAINN site that offers $490 for 10 R's ($49/R). Another prize is worth $580 for 11 R's. So that 11th R is worth an incredible $90, almost twice the average! You can offer a fortune for that one. If you only offer high payouts once in a while, when you're about to close out a prize where that last referral is worth more than average, that should keep scammers from targeting you. This is all theory from a newbie; let me know what you think.

Good observations!

The truth is, this really doesn't cost the site much, and the benifits of offering that higher cashout get more users, if the TRAINN site is offering either $49 per referral as opposed to the averaging it out at a bit over $52.50 per referral. Train actually makes more money on that.

How? Partial credits. For every user that doesn't have 0 credits, yet doesn't complete the offer requirements, the site gets paid money. You'll probably have at least four or five that don't complete the site if you need 11 to cash out, so in reality, the site is making more money off of that, as opposed to people that cash out on the lesser prize.

Some traders do this too but I believe that you should keep the amount you're paying the same.

Now, if you offer something as an incentive, like a raffle entry, or a bonus, that's icing on the cake! It's what I do.

I just don't see it as fair if I pay someone $70 to green on one of my sites, then turn around and offer $100, for the same reasons mentioned here. It's even worse because it throws up a flag that you're desperate for that last cash out and you're painting a bullseye for scammers.

[jb888]

Fantastic post! I could even follow your logic, and I don't consider myself good at math.

I would love to see this post made permanent in the Tutorial section!

[jb888]

It all depends on how you look at this. I don't look at the 11th ref as being worth $90. I just look at all 11 as being worth $52.72 each, and I pay all of my refs $26 for that site.

[Kusanagi]

Bump, for those that haven't seen it

[Kusanagi]

Bumped! Changed the wording and clarified a few points, now that it's not 3 in the morning...

[pearl]

High Payouts: - Pros and Cons

More trades and referrals as people are drawn to the higher payout
Able to cash out on the site sooner
Gives a competitive edge against other traders
Less profit per referral
Higher chance of getting hit by scammers
Recovering from a scammer takes much longer

Those last two can be eliminated if you pay on VERIFIED green, meaning you don't pay the referral until they have been approved by the site. With many sites this is only a matter of a few hours longer than "paying on green."

Low Payouts: - Pros and Cons

More profit per referral
Less of a chance to be hit by scammers
Recovering from a scammer can be relatively quick
Less trades and referrals, as users won't be attracted to the lower payout over the higher one
Can take a long time to cash out on the site you're working on

I also don't understand why how much you pay makes a difference in how long it takes you to cash out? Or are you equating that to how many/how fast you get referrals?

I think the biggest disadvantage to paying a high amount is that obviously, you make less money. The biggest advantage is that it does give you a competetive edge, but even that isn't so much when everybody else starts paying as much as you are!

I started paying 70% as a test, I'd change my trade thread and do different things to see what worked and what didn't. At first I said the 70% offer was only temporary. Well, I started getting more refs than I ever had before. Then other people started paying 70%, or 75, I've even seen one trader offering 80. So I realized I was sort of "stuck" keeping my rate at 70 or I'd go back to hardly ever getting any refs. So I'm pretty much at 70% to stay, but I'll admit, I WISH I could pay only 50 or 60% and make more money. I honestly think we all SHOULD be paying at least 60% because the ref has to spend some money, and kind of do more work. We just sit here and wait for them to green and collect the money, so it seems fair that they should get a tad more than we do. I think 60%, maybe 65%, is ideal. And it frustates me when I see people offering 75 or 80%. There's no way I'm going that high, and HOW far are people going to go with this? Will people someday be paying 90 or 95%, making only $5 everytime they cash out on a $40 site? I think anything over 70% is ridiculous, and I'd really love to drop my rate to 65% but I just don't feel that I can or I wouldn't be able to compete.

Now of course there are grey areas, people often offer bonuses and contests and whatnot. Also all the sites I do now are cash out on one referral sites. If I did another Trainn site or anything else where I couldn't cash out until I had at least 2 or more refs, I don't think I'd be offering 70%. With Trainn sites 50% seems fair because it does take a lot longer to get enough refs to cash out, and the person going green for you only has to do one offer. If I did another Trainn site I might be willing to go to 55%, but I wouldn't go higher than that (assuming we don't now have people routinely paying 60% or more for them.)

People do have a right to pay whatever they want, as you said, but I do think it gets ridiculous when you have people advertising that they routinely pay 80%. And with all the fraud out there, I HOPE for their own sake these people aren't paying on GREEN, they're paying on approval or verified green. I don't really mind paying 70% as long as I'm not paying until the approval goes through. And most of the sites I do are so good with customer service that this happens the same day as the person goes green, sometimes in just a couple of hours so it's practically the same thing as paying "instantly" on green.