Percentage of Profits

[devdan]

Has anyone worked with a client on a pay-for-performance model where you receive X number of dollars upfront from the client and then receive a percentage of profits from the work you do for them?

This would be for profits generated directly as a result of the work you do for the client - whether it be email marketing, SEM and landing page development, etc etc.

[rageh]

I considered entering similar arrangement but decided against it later. I did not want to be bogged down in an arrangment whos potential gain I was not s sure about.

But you have to weigh the pros and cons; is for example the estimated profit justified? What happened if the undertaking is not as profitable as you think? There are few questions that you need to find answers for first. However, If I were you, I would not take it.

[devdan]

I think you're right - there are cases where it may not be profitable enough to do this. There are things the client company may do from a process standpoint that could bog things down like the way they handle customer service, fulfillment, sales followup, etc.

However, if what you're doing has a big enough impact on the company's sales, it should be worthwhile to share profits provided the company can act on the additional business they are expected to receive.

[larkin]

Sounds like they are trying to get you to do work on the cheap. I may be biased, but I would suggest keeping things seperate. You do the work for a fee and that's the end of it. There are lots of people with lots of ideas, 99% of them, in my experience, will most likely fail when it comes to websites. Pay on performance is an employers way to getting out of paying a really good amount up front. But who knows, maybe this would work for you. Sorry about the bad sentence structure in this answer lol.

[Ted S]

I've worked with this sort of arrangement before but as someone in a marketing capacity, not just design/ code. Taking a rev share is certainly a viable option, many of the biggest businesses out there started with partnerships to cover development, marketing, sales, and other key aspects. The important thing to understand is where you fit in the food chain. If you're doing backend development and getting paid for net sales you're probably not going to end up happy.

Why? Because nearly everything in the sales and profit line is out of your hands. You don't control landing pages, user flow or the conversion process. You've got nothing to do with ad budgets, product prices, shipping, overhead costs or anything else that impacts margins. Therefore as a backend developer you'd be much better off getting compensated on the site's ability to preform or at a minimum, gross sales.

As someone in a marketing role (either directly or by doing all of the site's design), you may be much more comfortable taking gross sales as a good return since you control more of the traffic and user flow.

Regardless of your role, look at the existing business and try to honestly asses where it's going to go. If the site's doing $500 in sales a week now and not horrible it's fairly hard to imagine it will do $50,000 a week after you give it a facelift/upgrade unless there's a lot of money going into marketing. On the other hand, if it's making $50,000 a week now with a good marketing spend, a product line that isn't obsolete and a savvy owner and/or management team then there may be a lot of opportunity.

On a final note, you may also want to explore getting equity in addition to revenue if you really feel the business could end up growing to be big.

[devdan]

Ted - I agree with you. If we're talking about coding or something not directly related to marketing, then there isn't much of a benefit of going the revenue sharing route. In that situation, it's better to be paid by the work one does.

However, I am referring to work that is higher level that would serve as a marketing vehicle for the client company. It's more of a business focus as opposed to a technology/design focus. The business/marketing purpose drives everything else.

Since you've done this type of work before, are there any sample agreements/contracts out there you'd recommend?

[Ted S]

Since you've done this type of work before, are there any sample agreements/contracts out there you'd recommend?

I don't have anything I would use again myself (they weren't good enough) but you really need to write something customized to your situtation and the exact terms that will apply to your work and profit.

[mobyme]

I don't see this as something to automatically shy away from; last year we did this with a couple of companies because I believed in what they were offering the public. One has given a reasonable return on the time and effort that was put into it; the other has become a runaway success giving a fantastic return on the time invested and I have gone on to several joint ventures with the principal.

[devdan]

Ted - I would want something for specific services I'd offer, so it would only require a boilerplate template with filling in the details where needed. Things like upfront cost and % of revenue share, etc would vary.

Mobyme- That's great you've had success with this. What you mention is another benefit of this model - the client will keep coming back because of the great results you help them achieve.