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When an ad broker receives a percentage of sales,
should s/he help pay for investment into the site?
MichaelBluejay




msg:4160477
 6:01 am on Jun 28, 2010 (gmt 0)

A client and I have a disagreement about how to handle expenses for his website. He provides the content and I sell the adspace for a commission, which averages around 26% of ad sales. The question is, who should pay for expenses related to the site -- him alone, or both of us together?

Specifically, he hired someone else to help produce content (content that he couldn't have developed himself), and feels that I should help shoulder the cost of this new content developer, because I'll benefit from any extra revenue that his efforts generate. But I disagree, not only for the standard reason that I think the site owner's expenses are always his own affair, but also because I feel I've already "chipped in" by exploding sales. Let me explain that part...

I dramatically increased revenue by optimizing the ads to generate way more clicks per unit of traffic, and by ensuring he got the proper market rate for the space. (He'd previously been vastly undervaluing it.) Over about 1.5 years sales increased 689%. Traffic increased by 1.65x during this time, which we'll assume I wasn't responsible for at all, so I believe I improved the site's value by 689% / 1.65x = 4.2x. Thus, whatever return his investment in the site brings, that amount is 4.2x higher than it would have been prior to my efforts. So I feel I've already chipped in.

In response, he said that if every $1.00 he spent brought in an extra $1.40 of revenue, he would get only $1.40 x 60% = $0.84. (My commission rates are tiered, and any extra revenue is paid at the highest tier, 40%.) So he'd have to pay me 40% of the $1.40 ($0.56). So he doesn't think it's fair that his investment has a positive revenue return, but my income would go up while his went down.

My counter is that getting only $1.40 in extra revenue for $1.00 spent is just not a good investment for him, because it doesn't cover all his costs. (i.e., It doesn't cover my commission.) Not every investment always returns enough to be worthwhile. In this case the $1.40 on $1.00 is almost profitable for him. But before my efforts, every $1 he spent would have brought in only an extra $0.33 in revenue. It's through my efforts that he can even get $1.40 in this case on a $1.00 investment instead of only $0.33. And because the site now brings in 4.2x revenue as before, I've enabled him to have many more opportunities to have a given investment be profitable for him.

He counters that of course there's no way he would have invested $1.00 to bring in just $0.33, but if a $1.00 investment brings in more than $1.00, then I should help pay for the investment because otherwise I'd be the only one profiting. And if he declined to make the investment because he wouldn't profit from it, then I would lose out, so it's in my interest to help pay for the investment so I could enjoy the extra revenue. But while I agree that it would be in my interest to help pay for the investment rather than have him not do the investment at all, that's separate from the question of whether I *should* be helping to foot the bill.

What does the community think about this?

 

topr8




msg:4160525
 8:20 am on Jun 28, 2010 (gmt 0)

simple answer: it's his website, thus he should pay the expenses.

if you were partners it would be different, but it seems to me you are working on commission - you don't have a stake in the business.

tell him you'll pay but then you want a share of the business in return

akmac




msg:4161561
 7:30 pm on Jun 29, 2010 (gmt 0)

First, it is his business. Unless he'd like to propose a mutually beneficial partnership, the expenses related to the operation of his business remain his own.

That said, don't cut off your nose to spite your face. If a 40% "profit" would be entirely eaten up by your commission then your commission structure needs to be reworked. Specifically:

any extra revenue is paid at the highest tier, 40%


seems to be the sticking point.

It's in neither of your best interests to continue the status quo, as the current commission structure is effectively strangling new business for you both.

Without further details regarding what constitutes "extra revenue" I would propose that the extra revenue referenced above be split between you at a mutually agreed upon rate, with his take being larger than yours. The reason for this is that it's absolutely necessary that the owner remains motivated to grow his business.

I know that you feel you've already chipped in, but you do not have ownership of the previous increases-even though you generated them. HE does, because HE was smart enough to hire you. It is in your best interests to continue making him feel smart. I would tread carefully in these negotiations-as you risk poisoning a relationship that has been profitable for you both, and can continue to be with a bit of compromise.

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