How to Negotiate a Risk-Sharing Marketing Contract

[caption id="attachment_68928" align="alignright" width="325"] "Salary Negotiations," Creative Commons license. | Credit: Flickr by MIke Kline[/caption] The marketing service company’s smooth and promising presentation assures me that hiring it will certainly grow my business. “Trust us,” they say, “We have a winning strategy and we’ll all celebrate the fantastic results.” I want to believe them, but they come at a high price and we are not rolling in cash during these difficult and fast-changing times. If I were the potential client and they offered to minimize my front-end cost and share the risk of under-performance, I‘d find their proposal very attractive and credible. I’d feel comfortable sharing success with someone who is willing to share failure. Entrepreneurs know that a strong component of commercial success depends upon getting their businesses noticed and engaging customers to buy their products or service. They also know or should know that this marketing and advertising task can consume substantial resources. If they can get their marketing partners to share this investment, through some form of split of the generated revenue, it can be a definite win-win. That’s why revenue-sharing and other forms of remuneration are becoming the new normal. The historic 15 percent “commission” system was the basis for agency remuneration in the days of “Mad Men,” but tougher times have diminished the number of martinis and brought with them far more competitive systems of compensation. Now they are being asked — compelled, in some cases — to put their money where their mouths are: to mutual benefit. Some of the world’s most successful direct response copywriters have done this for years, and the winners have earned enormous sums from grateful clients who tried and tried, but were unable to beat the controls they created years ago. Some years past, on a conference panel, I asked an advertising sales director of Globo TV (Brazil’s largest media company) what value he put on a 30-second commercial slot that Globo had failed to sell. Looking at me as if I were an escapee from a gringo nut house, he said it was obviously worth nothing. What, I then asked, if a potential advertiser were willing to guarantee to pay? Say, 35 percent of the normal price for any unsold advertising spots, a standard procedure in the U.S.? He emphatically said he would never even consider it. If he still has a job, it is unlikely he would take that view today, when Google is gorging itself on 80 percent of the fall in broadcast and print advertising. To make revenue share work, the agency, consultancy or service provider needs to carefully do its homework. This “communicator” will first need to be able to assess the real cost of the time of the professionals who will be involved in the project. Using a matrix like this, which sets various ranges of monthly compensation, assumes 1,800 (or some more appropriate number) of working hours per year, it’s easy to see the “Actual Cost Per Hour” for each category of professional. But we all know that 100 percent of the hours will not be billable. (Sometimes, there really isn’t much to do but chat on Facebook.) So we make a guesstimate of the percentage (here, 60 percent) of billable hours and increase the “Cost Rate” accordingly. And of course we want to make a profit. (That’s the name of the game, isn’t it?) So to establish a minimum “Bill Rate,” we gross up the “Cost Rate” accordingly. And finally, we can round it up if we wish. The professional responsible for pricing this project only has to input the number of professionals in each category and the estimated number of hours each will have to spend on the project and ZAP, the professional costs (including the percentage for hours not billable and the profit-loaded (29.3 percent) quotation amount for the professionals) is ready and waiting. Collecting the other costs for the project, data, media, etc., (with or without mark-ups depending on policy and competitive pressure) and then adding them to the professional costs provides the essential baseline for a revenue share negotiation. You know your real costs and you know these costs with profit and the amount you would quote as a fixed fee. The old wise adage says; Never gamble more than you can afford to lose. That wisdom should inform what “revenue share” you are prepared to accept. But that’s only from the communicator’s side. What does the “marketer” have to know? And more importantly, what does he need to share with the communicator? The answer is simply how much he can afford to get an “open,” a clickthrough, a lead or a final sale. Which of these he wants from the communicator depends upon his briefing of the communicator and whether the marketer knows his historic metrics for the journey from advertising through to the final sale. Keeping it simple, let’s assume that the marketer knows his numbers and has an expectation of selling 500 units at $850 each. He can afford it, but is unlikely to want to pay 10 percent of $85 per unit sold. Because the communicator knows that to make his profit objective, he needs $26,125 or an alternative revenue share and must have a minimum of $19,592 to break even, he is well prepared to enter into a revenue-share negotiation. Let’s look at it this way. The communicator’s leverage for negotiation is the spread between his cost $19,592 and his quotation amount $26,125. To make its quotation amount, the communicator needs just $52.25 per sale. To cover his cost, he only needs $39.18. If the communicator receives $52.25 per sale, he only needs 375 sales to recover his costs. If the actual sales number is above 500, say, 550, the communicator will receive his full quotation amount plus 50 times $52.25, or an additional $2,612. The question for the communicator is how much to ask for? Sixty percent of the $85 allowable would give $51 per sale — just short of the $52.25 needed to make the quotation amount at 500 sales: 50 percent would be $42.50. Not bad. Looked at from the marketer’s side, with no up-front cost, sharing the $85 allowable on a more or less equal basis should seem fair. I’d argue for $50 per sale as a good compromise, but each negotiation is different and each person will have to define his own limits. Hopefully, the use of these tools and this methodology will help.

Advertising News

How to Negotiate a Risk-Sharing Marketing Contract

Peter J. Rosenwald

About

Subscriptions

Events

Publications

WORK SMARTER - LEARN, GROW AND BE INSPIRED.

Subscribe today!

Peter J. Rosenwald