Setting a Price

Commission instead of design fee?

[woop01]

A potential client is coming to my office this afternoon to talk about setting up an e-commerce site. He wants everything; affiliate management, search engine optimization (“tell me how to be #1 on Google”), pay-per-click (“getting in those sponsored things on Google”), online credit card processing, and oh yeah, a 100-product online catalog.

I just don’t think he’ll be willing to pay what I would need to charge him to do everything he says he wants. Rather than quote him $X,000 (or based on some of his comments $XX,000) I’m thinking about telling him I’d be willing to become a partner with him and take 10 or 15% of the gross sales from the site depending on what his margins are.

The funding for advertising would come from my cut and I would pay affiliates out of my cut. Essentially, it would be a glorified drop-shipping partnership. I know I’m all for it and I work extremely well with commission based partnerships. Just knowing that pulling an all-nighter may help my pocket book later on down the road rather than just eating up the hours I have left on the project is really nice.

Has anybody done this is in the past? How did your clients react to it? Any pitfalls that I should think about?

[DrDoc]

Commission is good... if you believe in the project ;)
Less money up front, but more money in the long run. 15% might be pushing it though, depending on your part in maintaining the site.

[dwilson]

Watch out that he doesn't, on his site, push his customers toward ordering over the phone instead. I worked with one place that did that to avoid a 1% commission on $600 products. And you'd better have an iron-clad way of knowing how much he's selling on his site.

Otherwise ... wish I were in your shoes!

[balinor]

I can't say as I would ever do a job like that. For me, getting paid for the actual work I do is better than the risk of never getting a dime. Sure, it may pay big dividends in the long run if this guy turns out to be the next Amazon.com, but if he doesn't, or he hides actual sales numbers from you, you are screwed. Just my 2cents.

[krieves]

Does he have a brick and morter business as well? If so, it might demonstrate that he is competent to run a business. To take a comission in lieu of upfront pay, you need to be confident in his business model and that he knows how to run it sucessfully. Little things out of your control could cause it to fail (shipping delays, out of stock items, poor customer service, etc.) and leave you with nothing to show for the work.

Someone I used to work with quit her job and partnered with her sisters to start an online woman's clothing store. They invested a ton of money it and it lasted about 2 years before it failed. They had inventory problems - too much some stuff that wouldn't sell, not enough stuff that would, and provided poor customer service. The lost a lot of money.

If running a business was easy, most of them wouldn't fail. :)

[danrobjon]

Been there done that so many times. I now say no. Really the main reasons have to do with trying to collect what is due you. I never take an equity postion in anything 100%. If there is someone that I have known for about 7 or 8 years and they are the salt of the earth, their word is gold, etc, etc, then I may offer to take 1/2 in cash, the other 1/2 in equity. I work hard to have enough work so that I can turn down this kind of thing. I have been self employed for over 20 years by the way and my dad was an entreprenuer. I watched him get ripped off about 300 times while I was growing up. I've been taken many times, both via poor management, twists and turns in the economy and outright fraud. Too many possible ways to not get paid. Just my 2 cents.

[woop01]

Does he have a brick and morter business as well? If so, it might demonstrate that he is competent to run a business.

Yes, this is a brick and mortar that wants to expand.

[krieves]

Well if he has a sucessful business already going and is going to supplement it with an online store, at least he is demonstrating that he has some degree of competentcy. However, as everyone else is saying, there is the issue of determining what you are due and enforcing payment. This should be clearly defined in a contract, in as much detail as possible.

Another thing to consider, if you are going to get paid a percentage of online sales, you might ask to include percentage of in-store sales as well (albeit a different percentage). The arguement being that the website may be driving customers (who may be unconfortable with purchasing online) into the store.

[eWhisper]

I can't find the other article that accompanies this one about how often people shop online, and then call in phone orders or visit the store. This article [ecommerce.internet.com] is similiar, but it's more about marketing, however, you should read it to understand how a website and physical store interact before entering into this type of agreement with someone.

I've heard that for some stores 40% of the people found them online, and then went into their store, or called in phone orders. If you're not careful, you'll lose this entire type of comission.

[jennifer]

We have done this with two of our customers and it has been very successful for both. Both of them keep track of people who call in as well as those who order over the Internet and we are provided commissions on both types of sales.

Basically, you have to see how much you trust this potential client. Also, bring up telephone sales in your preliminary discussions and find out how they will keep track of sales. It can work out if everything is clearly laid out ahead of time.

Good Luck.

[Stores]

I always cover my costs upfront at least - plus a tad bit of profit, then will take a %. Must be a healthy percent, or a product I think I can crush the market on though.

[caine]

Basically in a situation like that i would look for a big upfront fee too pay the mortgage and buy food, and make a down payment on a new car ($15K+) before even considering starting anything, then with a %fee, dependant on the upfront fee, projected profit margins and realised targets, i would happily go with the fee idea (2-3%). The fee may not be a good fee, if your talking cheap minimal sales, and hence may need to be upped a bit.

Personally i would taste their proposal, mention numbers (though nothing firm) and say that you will get back to them, once you have researched and analysed what is involved in the R&D, future proof site planning, affilaite scheme viability and implementation, and the E-comm side.

Never try to do a deal in a heartbeat unless you know (and i mean can smell the roses) that it is too good to be true.

[mep00]

I just found myself with a simular oppertunity, but with some differences. The company I'm involved with is a new company and I've been offered a piece of it. One reason the head of the company rather go with a commission is that he's been trying to get this business started for a few years and has been burned a few times. Another is lack of cash because of the first reason.

For me, though, I see it as a win-win deal. If the business is successful, I'm assured a large, steady income. And if unfortunatly it's not, since I'm just starting out, it's a chance to show future customers that I'm as good as I say I am; something very hard to do without a porfolio to back you up.

[danieljean]

I've set up my business to mainly sell on a commission basis. I'm also considering starting my own sites and contracting with drop-shippers.

Too many have been burned with $15k websites that have a lot of flash and drive people away. I don't think they could last very long if they used a commission model. Besides, my costs are droping for each new store as I re-use code components.

From experience, there are a few other things you might like to consider.

Seasonality. Most businesses make 75% of their sales in the 3 months before Xmas. Having some that sell inventory in the spring or throughout the year is good for cashflow. Also, will their site be ready a few months before their high-period, or will you wait a year to see decent returns?

Margins. Many retailers have 40-50% margins. Asking 10-15% is really low, I spend more than that in Adwords alone. The retailer should cover shipping, and I ask for 25-30%. Margins can be also be set based on product type, or time of year (e.g. renting a hotel room during the off-season is more valuable than when it's already booked solid through off-line channels, so commissions could vary).

You need to have enough money to pay affiliates, your self and have some money left over for growth.

Another way to charge is to ask for your margin, and ask them what percentage of sales can be ear-marked for advertising. I would be happy making 6-10% if 15-35% goes to marketing.

I also won't speak to any retailer that I don't think will see more than $100k/yr, based on search numbers in OV and G, industry information, etc.

Good luck!