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From time to time, I come across a consulting “expert” who loudly proclaims that nobody should ever offer their services on commission/revenue share arrangements. Now, I really try to force myself to think up the most charitable explanation for things, so I like to assume they're saying that because they think their audience won't understand the nuances of when you should and shouldn't accept that kind of arrangement. Then again, it's also possible they're just not very good at what they do, or they don't realize how much they've screwed themselves over by completely ruling out revenue sharing arrangements.
I've been consulting on a freelance basis for well over 10 years now, and there have been a number of situations where I could have made literally hundreds of thousands of dollars more if I'd been smarter about how I structured a long-term project. There are plenty of times that wouldn't have been the case, and plenty of times where it would have been roughly equal, but those times I left tons of money on the table still haunt me just a little bit.
Pricing is tricky business, and while most of us start out simply targeting an hourly rate, good consultants quickly learn there's much more to it than that. It's a complicated game of trying to make sure you always give the client more value than you take back, but where you also try to keep as much of the difference as possible. It gets hard because (a) you rarely have a clear idea of just how much value you'll generate, and (b) you have to structure your pricing in a way that makes the client feel good about the arrangement.
As you get more experience, you'll get better at both. Most of the time, commission-based arrangements aren't in your best interest (more on that here). Sometimes, though, they can really pay off – like any of the below situations would have if I'd been better at pricing when I took the projects.
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The Froyo Franchise
There was a time when I seemed to be consulting for half the country's frozen yogurt franchisors. It wasn't intentional, it just sort of worked out that way thanks to referrals. One particular client stands out, though.
This frozen yogurt franchisor was a fantastic client. Although the CEO was a bit intense, the company was willing to give me the budget and freedom I needed to really dial in their campaigns and make them work. Things were going well, but I didn't realize just HOW well until the CEO mentioned that my campaigns had generated more than $50 million in new franchise fees (not including royalties) over the course of our work together.
How much had I charged them? Let's just say that if I had charged them just .1% of the franchise fees generated by my campaigns, I would have been better off. The return they earned on my campaigns (even after generously accounting for ad spend and overhead) was truly, completely insane, even if you use very conservative estimates of their expenses. If I had approached them with an offer to work for half a percent of new franchise fees generated from my campaign, I would have walked away with a cool $325k. The 20 or so minutes of weekly optimization work would have amounted to a six figure job, all by itself.
The International Dating Company
Once upon a time, I put in a big on a project I was vastly under-qualified for. A dating company needed an affiliate program to be built from scratch, and they needed someone to get them active affiliates quickly. Some limp, under-powered in-house program wasn't going to cut it. They needed power.
I was the only bid on the project and I started off working for peanuts and spending far, far too many hours figuring out how to do technical things for which there was no manual. At the time, it was such a weirdly specific set of tasks that I hadn't really encountered anything like what I was doing (working with a developer to design a custom system to capture the leads and work with the affiliate tracking of multiple networks while also detecting fraud). I remember a lot of sleepless nights thinking about how I'd have to give the money back to the client because even if I DID figure it all out, I'd surely never get enough affiliates to out-earn my pay.
My self-doubt was misplaced. The program turned out to be wildly successful, with hundreds of thousands, even millions of dollars of leads coming in on a monthly basis. Since many of those users would continue to use the site for years, some would generate hundreds of thousands of dollars all by themselves.
I did negotiate an increase in my retainer as time went on, but if I'd had the experience to understand the potential and better trust my abilities, I would have started off with either a full commission-based retainer or a base + commission retainer. By the time I realized just how much money I was making the company, it was too late to sell them on something like that. The hardest part was done, and the program had serious momentum. Even if they'd switched to another provider at that point, that person could theoretically coast for years on the work I did in the first 6-8 months of the program.
It did turn out to be great experience, though, and I continued to consult on the program for many more years. I met a lot of great people within the company, met industry contacts I never would have encountered on my own, and traveled quite a bit on their dime.
The Burger Franchise
This one's a bit less dramatic, but still a great illustration of how little you can get paid in relation to the value you generate if you're not careful. I was doing search engine optimization (SEO) for this client and I had agreed to a low 4-figures monthly retainer for a set of keywords that wasn't *too* competitive (we're not talking “mesothelioma lawyer” or “best credit cards” competitiveness, after all).
In the beginning, I wasn't making them a huge amount of money. That's typical of SEO, though. If the client is breaking even on your services after 6 months, that's pretty solid performance (since white hat SEO is a slow process with a lot of long-term value). Around 6-8 months ago, though, their organic search traffic exploded. Suddenly, they were up 1000-1400%, year-over-year, with insane lead flow to go with it.
Now, this client hasn't yet told me just how many new deals came from the leads of the last 6 months. I DO know, however, that if I valued the clicks at their average AdWords click cost, they'd be worth somewhere between $125k-175k. If I valued the leads at their typical cost per lead, it would be worth around $200k. Based on what I know of back end franchise conversions, however, I'd be incredibly surprised if they earned less than $5 million on the leads once all is said and done.
Remember, though – no matter what they're making on the leads, I'm still making that low 4-figure amount each month. I should have negotiated based on lead count or organic traffic volume or new franchise fees, but I didn't. I priced my services in line with the other quotes they were receiving, and I totally screwed myself.
A Word of Caution
I'd just like to add that results and commission-based arrangements aren't for everyone. You have to been good at what you do and you need to have enough knowledge of both business and your personal skills to know when it's worth the gamble.
As a general rule, this is not a great approach for newbies, although base retainer + commission is a slightly more forgiving model. You need to get really good at judging your potential impact first (and the client's willingness to let you do what it takes to get there).
You also need to have a strong relationship with your client or potential client, as you'll need to be able to trust the data they give you to calculate what they owe you. If their sales team isn't tracking what happens to your leads, or if they're intentionally lying about how many turn into sales, you're not going to get the money that's due to you. Then again, when the potential for scale is there, it's worth the extra investment of time it may take to get those systems in place.
Trust is also important because some clients may try to get out of paying you what you're owed if they think you're too much more than what they expected to pay out. You can always remind them they wouldn't have had that revenue without you, but some clients are just bad people. I try not to work with bad people, but none of us are perfect judges of character (and some people change when large amounts of money are involved). Get EVERYTHING in writing, and be sure to document your results. You may be partners in your client's success, but you have to protect yourself.
Commission/Results-Based Compensation Experiences with Clients?
Have you ever arranged a commission or results-based fee with a client? Share your experiences, good OR bad, in the comments!