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Fair commissions .. need figures.

I have posted a brief case study.

     
7:09 pm on Sep 25, 2002 (gmt 0)

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I built a site for a client about a year ago. It sells widgets of about 500 makes and there are about 50K widgets in all. I optimized just the home page then and we waited for the traffic for 6 months. Site did not do very well for the first six months (about 1K USD sales in 6 months). Then we tried google adwords and orders started to trickle in @ 1K USD/month. Then I learnt some more SEO and worked on it for 2 months also optimized adwords .. and the current sales stands at 10K USD /month which has been at that for the last 3 months.I feel that there is lot of room for improvement on the site on SEO front and my gut feeling is that sales can go up to atleast 25K/month in near future with those optimizations in place.

All I took as fee from my client was the original 2K USD and that was only for development of the web site and basic maintenance for one year. I did not ask for any thing for SEO from him because

1) I did not know in the beginning that SEO could be that powerful ;)
2) I did not know I could do good SEO when I started .. so I just treated this as an experiment.

But now I know what SEO can do. My first year maintenance contract with my client is coming to an end. While thinking of what fee to ask for, for the next year I felt that commission on sales based system instead of a fixed fee would be most suitable for me as well as my client. I asked him if he would like that for future. He has asked me for the figures .. and that is what I need to send him next. And that is why I am here :) .

What I bring to the table is SEO, programming+development part and hosting ie entire technical part. His profit margins are around 50% , owns the domain name and will pay for googleads and other PFCs which stands at about 5% of total sales currently (PFC sales are about a third of total sales and rest are SE).

Thanks for reading all the way.

So what is a fair percentage on sales as my commission.

7:29 pm on Sept 25, 2002 (gmt 0)

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I think you are in a bit of a bind due to the fact that he originally paid so little. If 2k turned into 10k per month in sales than he will probably have a hard time with anything over 5k. (that's based on the assumption that 25k per month is realistic).

The other tough issue is the fact that for the most part, his current level of sales will continue whether or not he renews with you. So you really need to be able to sell him on the idea that you really could boost his sales into the 25k range.

7:35 pm on Sept 25, 2002 (gmt 0)

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I don't think I'd mention that sales will continue at same level without your help, I would stress the opposite. Minor algo changes could make those sales drop off to nothing, and by not having a working seo around, he won't likely see those figures recovered.

my 2 cents.

11:04 pm on Sept 25, 2002 (gmt 0)

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Why do you think sales could go to $25k?

Would you be expanding demand in the market, taking market from someone else, expanding geographically?

You say he makes 50% profit, is that after shipping, business license costs, accounting fees, ...?

What I hear you thinking is I do work for a month and he benefits for a year or so.

<Not FAIR !>
^

How about an incentive based contract. Every month sales are up to x amount I get y as commission? You could work a sliding scale.

You could work hard and be happy, he would also do well.

You need to word it carefully for things that may change like supplier product costs, postage costs, are you working towards just sales volumes in $s or number of units <he takes risk for price changes> or for part of the net profit before taxes?

You may want to speak with an accountant for advice.

..... Shane

11:37 pm on Sept 25, 2002 (gmt 0)

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I think the fair thing to do is work for free and take a cut of the fee above 10k/month.

It sounds like you got a poor deal, but it was the deal you made, based upon the lack of knowledge of what could be done. The situation could of turned out with them losing 2k and selling nothing but at least you got your 2k.

And remember, it's not only what you did for them that's responsible for the sales. They obviously have a good product, customer service, good will, etc. They also seeded their business, invested time and money into building it, and probably lost a little money until you came along. You supplied the eyeballs. That's it.

If you can convince them to give you a cut of sales above 10k/month, that's reasonable.

But it seems you may want to have your cake and eat it too. Unfortunatley we can't revise our bets after the horses are out of the gate, much less after they have run, and I think you know that too.

In the beginning, you didn't know how successful they would be. Suppose you gave them a sweetheart deal? "Pay me nothing but commission! I stand behind my work so strongly, you don't have to pay me a cent unless you make 10k per month."

Well, yeah, who wouldn't resist that? This is the position you WISH to be in right now. It's lucrative. But here's the rub: HANG THIS OFFER ON A SHINGLE AND OFFER IT TO ALL NEW CUSTOMERS. That's risky, and I wouldn't do it myself, because it is too risky.

Between the lines I sense a little resentment that they are making a ton of money, and you are not. That they somehow owe you something. But they don't. They took the risk. Certainly, if they were nice, they would throw you a bonus... But they are not obliged.

The safe way is predictable, but steady. And that's the path you may ultimately choose to take. Don't feel upset because these people are making loads of money. A deal is a deal. They don't owe you a cent of it in commission. Not a penny.

If you want to strike a NEW deal, then that's another matter. A new deal to work for free except for commission on amounts over and above 10k a month seems like a fair deal. After all, it's a sure thing, right? ;)

Otherwise, you're asking for the security of being paid, without any of the gamble. The gamble works both ways. Like offering the commission deal to a merchant who ultimately ends up selling nothing, but at least he doesn't have to pay anything to you. That's the gamble. Do you really want to play that game? Is the risk acceptable?

I apologize if I offend you. That is not my intention at all. I'm only stating the rationale of why I suggest what I am suggesting.

:)

12:00 am on Sept 26, 2002 (gmt 0)

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That's the way to play the game. ;)
7:55 am on Sept 26, 2002 (gmt 0)

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Hello every one .. and thanks for the wonderful replies. Esp martinibuster and Shane since they have made some very good specific suggestions.

I think the fair thing to do is work for free and take a cut of the fee above 10k/month.

This is the best idea which never occurred to me.

I do not think I got a poor deal earlier though. I never knew the site will sell and 2K was reasonable for the work he had asked me to do. What ever I did beyond that was purely because I wanted to actually hone up my SEO skills and used his site for that .. since he had no traffic at that point of time and hence nothing to lose, it was a win win for both. So there are no resentments or regrets .. its just that I see an opportunity now and I want to take it. I am absolutely ready for a gamble which pays me commissions only if the sales done per month are above the current levels of 10K/month. The reason as I mentioned earlier is that I believe its easy to take sales to 25K within a short span of time with some nifty SEO moves.

Infact I think its much better to ask for a cut for sales above 10 K because that will probably let me convince him for a bit higher percentage than I would have otherwise dared to ask as well ;) .. and even if I ask for 1.5 times of what I would have otherwise asked for .. it will be much better received from his side. Its a better deal for me as well because as simple mathematics reveals if I had asked for x% and sales goes to 40K down the road (which is not unrealistic at all) I get 400x .. where as if I ask for 1.5x% for sales above 10K .. then at 40K I get 450x.

Talking about a few points that have been raised above

1) WebGuerrilla and RedEyes, yes I am pretty sure that sales at current 10K/month will continue for a long time to come if SEO is stopped where it is. That is because most sales are coming from a very broad range of very niche keywords which never had any tough competition in the first place .. what I did was just to find out what those niche keywords were and their combinations could be.

2)

Why do you think sales could go to $25k?

By taking market share from compititors.

As I mentioned above that we are getting most of the sales from leads generated by niche keywords in google. For the most important keywords we are still on page3 and beyond on google. The site has a PR of only 4. Competitors are in 4-5 range and all (about 10 of them) rank higher than our site for primary keywords, so I see a big room for improvement there. We do not have many sites linking to us yet (Only directories Yahoo,Dmoz etc.) .. that is just because we are the latest kid on the block in the field and have never asked any one for a link yet.

3)

You say he makes 50% profit, is that after shipping, business license costs, accounting fees, ...?

Well it could be 60% or 40% after every thing. Its just an estimate and does not really matter much because I am not going to ask for a BIG PERCENTAGE.

Its a fresh deal .. I am willing to take the risk .. I want a win win deal take my x% of sales ..and may even give him a link to this thread once the deal is signed ;) and I want your help to figure out that "x". Please help me to choose from the following choices x = 4,6,8,10,12 where x is a percentage that I should ask for, of sales above current level of 10K/month from a business which makes atleast 40% net.

And if you think this range does not have your right number .. please post that number and let me know the min and max you think is the right range to negotiate.

4:04 pm on Sept 26, 2002 (gmt 0)

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Let me ask you a question. You make the deal, do the work and HE CUTS YOU FREE! What would you or could you do?

I think that making the percentage calculation is important but it is only part of the deal. Having made some of these deals and some have worked fine, some haven't, I would write down some worst case scenarios and what your response would be.

To calculate the percentage we would need to know how likely your client is to go to someone else, how much competition there is, how astute they are, how reasonable a business man they are, how greedy they are, ..... And HOW happy you would be with the percentage you go with. It is a gamble, although a safe one, only your time at risk, I think only you can calculate the percentage you would be happy with. (Remember, after you place the bet and win, you can not go back and up the bet, if you place a high bet you might be able to lower it.)

Sounds promising though.

Good Luck,
Shane

4:16 pm on Sept 26, 2002 (gmt 0)

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You make the deal, do the work and HE CUTS YOU FREE! What would you or could you do?

Good point. But that's what contracts are for.

I think you're correct, the web site does indeed have room to improve and a solid, well done link campaign is the way to go. Sigh... Such hard work!

I wouldn't advise cluing him in to webmasterworld. This is privileged information for the benefit of those (US) who are seeking it out, not to be dropped on someone's lap, especially a client. ;)

Good luck, I hope you make a ton of money!

4:57 pm on Sept 26, 2002 (gmt 0)

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I would agree with martinibuster, do not invite him here to WebMasterWorld.

I wouldn't mislead him, but I would not show him the inner workings of what you do, how often you do it, why it works.

Contracts, hmmmm, I don't think you want to get to the point of ever having to enforce a contract. My point is though, the contract should address more than I do this and you get that. It should cover the what happens if items, timeframes, defaults, .....

Best of Luck,
Shane

5:48 pm on Sept 26, 2002 (gmt 0)

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The more you get into his pockets the more he will look for an alternative. The only way to ever get what you deserve is to have a grip where it hurts.

For example:
The PFI pages with Inktomi are placed on our account, not the clients. We bill them for the inclusion costs but if they drop us as a vendor we inactivate their pages and they disappear from the Inktomi rankings in 48 hrs.

We make a client's PR (for Google/Yahoo/AOL) depend greatly on links from other client sites of ours. By using links from existing clients we also have control over the necessary keyword anchor texts. If we're dropped as a vendor those keyword rich links disappear. Their rankings disappear on the next Google update.

We charge a flat rate (weekly) plus a commission override when sales exceed a threshold. Remember, the client gets paid DAILY in ADVANCE for the internet orders. Within a day of processing a customer's credit card the money's in their bank account - before they've sent out the order. There's no reason for you NOT to be paid weekly. Don't be upside down 30 days down the road if they decide to bump you. Smaller weekly checks are not as eye opening to the client as a large monthly one.

Experience has taught that clients get many sales conversions from people calling direct by phone to place an order. The 10K/month generated by your site is already at 15K/month without you knowing it. You'll always get jacked out of that.
How is the existing customer base worked? E-mails? Coupons? That's a source of repeat orders you need to get in on. Grab a bonus commission by getting involved with that.

There are other techniques we use to "influence" the client's decision regarding our retention and payment for those services. Those I will omit from public conversation.

.

6:17 pm on Sept 26, 2002 (gmt 0)

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Nell,
That has got to be the smartest thing I've read on these posts today! It makes total sense, covers your behind, retains the customer... Brilliant. Thanks for sharing.
8:55 pm on Sept 26, 2002 (gmt 0)

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Nell,

What I attempt to do through the contract you have accomplished through potential withdrawl of service. Excellent!

Nicely done!

Humbly
Shane

4:56 am on Sept 27, 2002 (gmt 0)

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Wow :)
Thanks Nell.
Your ideas sound great and come at a very crucial juncture for me which makes them all the more valuable.

Weekly commissions makes a lot of sense.

Getting him to depend on domains I control .. definitely some thing to keep in mind for future.

Accounting for Phone orders .. well that is another great point and the least I can do is mention in the contract that all orders through phone or mail are entirely his. (I can't do much about them any way but atleast it gives me another point to negotiate for a bit higher percentage for online orders. )

Great Stuff.

And yes I too feel that I was getting bit over enthusiastic about inviting him to read this thread .. so no such invitations :)

Thanks every one .. and now I will go and prepare my proposal to send.