OSM-CS: How Can Marketers Verify Partners’ Revenues?

Jeff posted this excellent question in response to the OSM-CS model.

Hello and thank you for your article. I am definitely interested in the concept and potential of profit sharing for my marketing services, but I have always been discouraged by my inability to answer one seemingly simple question:

How can a marketing company reliably verify their client’s profitability as a result of their services?

In the past, I have proposed my services for free with the profit sharing contingency and I never truly felt comfortable because I had to rely on the client to be transparent with their finances and the success of the marketing campaign.

For instance, if I offered to design marketing materials (website, brochures, social media, direct mail, videos, etc.) for a local law firm that previously had none of these resources, I would ask for a specific dollar amount or percentage of each new client they received as a result of my services.

Unfortunately, however, I cannot verify how many active clients the law firm is getting because I do not work there full time and would have to trust what they tell me. What if they claim they saw no increase in their number of new clients? I would have no way to verify that this was accurate or not and would have no reason to request payment.

This isn’t a hypothetical situation as I actually went through an experience like this and we decided to end the relationship. This was after I already gave them dozens of hours for work on consulting on their website, social media, and produced several marketing materials for them that they continue to use today. If these resources were not successful, I don’t think they would still be using them, but I have no way of proving that they worked. Ultimately I received no payment for any of my services with this client.

How does a marketing company position themselves in a way that they can verify each new client or an increase in profitability without having to rely solely on the word of their client?

Thank You,
Jeff

My Response

This is an excellent question, which goes to the core of why and how profit-sharing relationships work.

The short answer is, with profit-sharing, you shouldn’t have to verify a partner’s revenues strictly.

I know that might sound weird. But it’s true.

The principle of profit-sharing is that it should be a win-win. Both the service provider and the client should want the relationship to continue because they both get more benefit than cost.

If it is not a win-win, clearly the relationship should not continue anyway. That’s why we say that there is no need for a contract, simply an informal agreement or letter of understanding.

OSM-CS tries to construct these relationships such that the forces are in balance. Nobody should have invested more than they can risk. And, if there is abundant growth, everybody should be compensated in a way that they perceive as fair.

Agree on the Metric

The simplest answer to Jeff’s question is to advise partners to agree on the metric that both sides will use.

It makes sense to be clear about the agreement between the parties.

If the profit-share is based on gross profits or net profits, that would require insight into the client’s accounting, which is unlikely to be forthcoming.

If the campaign sells online, something that is often easier might be to work off e-commerce statistics in Google Analytics, which is pretty easy to set up and to share, and does not expose too much sensitive information.

In the case of a law firm, the conversion goal would not be monetary, but might be a new contact form submission. In this case, the partners (service provider and client) should agree on an arbitrary value for a new lead.

A Per-Lead Pricing Method

In a lead-gen situation, I will often use the following thought experiment…

If I had a list of one hundred hot leads in my hand, what is the maximum price that you would happily pay me per lead?

This is an example of the kind of mechanism we can use to balance the forces. If a client would gladly buy all 100 leads at $20 per lead, would they gladly pay $25, or $22?

If the agreed lead-value is high enough, the marketer will be confident that they can get a healthy return for their efforts, and the partners will proceed on the basis of that agreement.

If it is too low, the marketer may try to push the price higher.

Of course, if the price is too high, the client may not be confident in their own profitability, and there may be no agreement.

If the price is too low, the marketer may not see enough potential, and there may be no agreement.

Balancing Forces

https://www.flickr.com/photos/ftmeade/6947321108In any of these cases, the right result is reached. There is nothing wrong. And that is part of the beauty of the profit-sharing model. We only proceed to execute campaigns that should be executed. If we cannot see where we’ll find enough profit to compensate all parties, that is a risky situation.

Again, there is nothing wrong with a risky situation. But someone has to be prepared to take the risk. Traditionally, that has always been the client, who must pay the contracted marketing fees and hope that the campaign pays off.

It is also possible that the marketer might shoulder some of the risk. But if they do so, they should do it consciously.

Walking Away

As I have said, in the OSM-CS system, we don’t rely on contracts. Contracts would be required to (attempt to) compel either party to deliver on agreements that they don’t want to deliver.

In a win-win situation, why should this ever be the case?

If, at any point in the future, the revenue the marketer gets does not justify their continued work, they may walk away from the arrangement.

Likewise, if the revenue the client pays out is not justified by the growth they are seeing, they may sever the relationship.

Logically, it is likely that these two situations would coincide. And, in that case, if the profit-share is not delivering a win-win, again, walking away is the right thing to do.

Renegotiating

If it seems that the revenue-share agreement no longer balances forces, i.e. where input and reward are not in proportion, then either side of the relationship may also choose to renegotiate the terms. That would also be an appropriate measure, and a possible alternative to walking away.

Getting Stiffed

Obviously, we can all worry about partners lying about their revenue, as Jeff’s question illustrates.

But, again, with a balanced profit-share arrangement in place, where neither side is being too greedy, it is in everyone’s interests to pull together for growth, not to grab all they can.

If a client were to stiff the marketer and misrepresent earnings in order to pay out less in profit-share, that would be dumb, because it would claim there was less growth.

In that case, the marketer may feel inclined to walk away, or to invest less effort in that project, redirecting their skills into other partners.

Fixed-Fee Element

In the interests of balancing the forces, it is often necessary to include some kind of combination of profit-share and fee-based compensation.

Specifically, if there is a significant amount of work that needs to be invested (say re-launching a whole website, or doing extensive keyword research), it would not be equitable for the marketer to invest all that work over a short period without a corresponding investment from the client. So, it makes perfect sense for there to be an initial fixed-fee engagement to cover that work, after which you would transition to a profit-share model.

That’s one reason why profit-sharing exclusively is not always the right model. Profit-sharing works where both parties gain:

  • The client sees supplementary growth in their business, which means their profits grow and they do not resent passing a share of those extra profits to the marketer (or team);
  • The marketer receives income from their share of profits that rewards their investment of work, ideally increasingly over time as the business grows.

So profit-sharing is ideal where there is reason for the service provider to be engaged with the campaign over an extended period of time. This would be appropriate for strategic guidance, on-going SEO, content production, conversion optimisation, etc.

To take Jeff’s example of producing marketing materials for a law firm, if there is significant work to be done up-front, I would imagine a combination of fixed-fee contract to cover the production of the materials, followed by an on-going profit-share for the rolling out of the longer-term marketing strategy.

Ben Hunt

About the Author

Ben Hunt

Ben Hunt has over 20 years' experience in web design and marketing, and has written numerous books, courses, and presented at seminars round the world. In 2010 Ben created the world's most complete web design course, and in 2015 founded Open Source Marketing.

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Jeff

Hi Ben,

Thank you so much for taking the time to respond to my original question. I tend to be a pretty passionate person and when I go for something, I generally put everything I have into it. I think that my excitement and interest in the potential of profit sharing blinded me to the idea of using a fee for my initial services of developing a website and other marketing materials before transitioning into a profit sharing model. If I could go back in time, I would probably have proposed a more blended approach to working with the law firm.

I also appreciate the lead generation model you mentioned where I can collect a predetermined fee for each form submission. With the law firm, all the marketing materials directed people to call the office so I could never verify how many calls they actually received. I can, however, verify form submissions through the websites I create.

In any case, I really appreciate your thoughtful response and I think my hope for implementing a profit sharing model has been restored.

Thanks again and have a wonderful day,
Jeff

Art Adams

I would suggest that the developer keeps ownership/copyrights to the marketing materials/websites with the client paying for the results, with a buyout option if either party did not want to continue the relationship.

    Ben Hunt

    That’s one option we’ve also explored, Art.

    It would seem to be a good way to bind the relationship, if the marketer/developer owns any additional channels that they build. Then, if the deal breaks down, they can always repurpose those assets for a new client.

    One client I interviewed did not like that idea at all, though. Additionally, it leans towards the CPA affiliate type of arrangement, which may be appropriate in some circumstances, but not in the majority.

Jason Pelker

As a shortcut, I’ve found it revelatory to work only with clients who exclusively sell digital products.

That way, revenue can be: a) accounted, b) directly manipulated via online marketing and c) verified via A/B tests and Google Analytics.

Managing digital sales has made proving my worth and claiming revenue share so much easier!

Phil

I recently asked a couple of my experienced consulting friends if they ever do profit sharing and here’s what they said:

1. “I charge hourly or value based per project, not based on any increase in sales. I have two major reasons:
1) I don’t have full control of the client’s business, product, customer service, etc. Not being in control of the entire business, I could do a great job on marketing, conversion rate optimization, etc, but not have the impact on top line revenues, profits, etc that I could with another company with a better product.
2) As a business owner, I would never go for this. I understand the premise, but we are growing at a good pace ANYWAY. I’m not willing to pay a consultant a % of our growth. So, I feel if I charged this way, I might lose out on some interesting projects.”

2. “Even with split testing and good tracking it can be tough to quantify every increase when you are working on things like a new guarantee or branding. I’ve been considering raising my rates and just eliminating the percentage to make it simple for that very reason. I’ve had the benefit of paying for a lot of different consulting in the past for my own online business and I can say that I’ve never actually paid a consultant a percentage. It is always a flat fee.”

Personally, I would love to do profit sharing, but since profits often come many months down the road from the type of work I do, I like your idea of having a fee up front + profits sharing later.

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