Or: Why pay for performance is bad for everyone
One of the most common arguments in the SEO and internet marketing community is whether the work being done should only be paid for if there are positive results. There are plenty of arguments on both side, if you are really good at what you do you should be willing to take the risk and reap the rewards for a job well done, or even more aggressively the question is asked, why aren’t you confident enough in your skills to be willing to take on the risk of success or failure?
There are generally three types of people that think this is a good idea.
Type One: The Idea Guy
We all know this website owner, he has this amazing idea that will make everyone millions, if only he could get your expertise behind him so that the rest of the world knows how great it is.
Type Two: It’s All Snake Oil, I’ve Been Burned Before
I actually have a little empathy for this business owner. She tried to do it right once before, but didn’t know enough, or research well enough, the company that she hired and they either had zero success, or worse, got her site and business penalized.
Type Three: The Challenge
This one tends to be the worst. He tends to dominate any conversation and is always demanding that you “prove” yourself. Or if you were “really” good you would take the risk for the huge reward.
I admit that in the past I did these types of deals all the time. But the web was a different place back then. Very few businesses had websites. No one wanted to take the risk of developing a website and hiring programmers, this was long before DIY websites like WordPress or OpenCart existed, and very few people wanted put in the time needed to reach their goals. It was a lot easier to demand larger percentages back then, demand more control, and be in charge of everything that happened online. But even with all of these advantages, we got screwed on every single deal we made at some point.
Worst Case Scenario
In the late 90’s we joined up with an all natural cosmetics company. Being animal friendly and all natural was just starting to be a huge deal in the industry so we saw an opportunity to work with a small company and help all of us make more money. We signed a deal that looking back was a bad deal for everyone, but one that is common today, we would get 12% of every sale on the web. Nothing more. No monthly minimum, nothing. Our team put in 3 months building the website, then another 6 months on heavy marketing. Finally, 9 months in to the project we started seeing enough sales to think we were going to make it. Up to this point we had earned zero dollars.
For the next 6 months we started to slowly gain more and more traffic and sales. Our monthly checks went from $1000 a month, to $2000 a month, to $3,000 a month. And there it sat for about 6 more months. Everyone was happy, we were earning back out time investment, the client was making a lot of sales they would have never had before. Then it happened. It exploded. Suddenly our checks were $10,000 a month, then $15,000 a month and it continued to climb. And this is where it all went to hell.
Someone asked our client why they were paying us so much “just” to run their website for them. When it came time to renew the contract the client walked. We stopped working, and called it a break even on our side. The client gave no consideration to the fact that we took them from ZERO sales online to over $150,000 a month in sales. They gave no consideration to the fact we worked for 9 months for free. All they cared about was that we were charging them serious money every month to do what their friend’s kid would do for $500 a month.
So where did it go wrong?
The problem with this type of arrangement is that the client is always happy to have you doing it “unless” it becomes incredibly successful. When you are working for free or very little everything is great. But when you hit that home run suddenly you are massive drain and expense. The client will not remember the hard work, they never see it, and will rarely remember that the goal was to hit a home run so everyone makes money.
The Risk Isn’t One Sided
The client’s have their share of risk as well.
Risk One: Nothing happens
The most common problem that clients see on this type of deal, they picked a company that uses this as a tactic to gain clients, but isn’t really very good so the results the clients see is limited at best. This leads to delays, having to start over again with someone else, and potentially losing market share.
Risk Two: Partners becoming competitors
Your partner becomes your competitor. This is a risk in a lot of areas, but no where so much as when you partner up with a company willing to work on a pay for performance basis. Perhaps she isn’t given the freedom to do what is needed by the client, or perhaps she is just trying to learn a new niche and using your product as a learning tool? Is this terribly common? No, but it does happen, and now you have a marketer that knows your business inside out going directly after your customers.
Risk Three: Penalties
This risk is new, and likely the most dangerous for a client. In the past poor performance simply meant poor performance. That is no longer the case. Suppose the marketer isn’t seeing the results he needs to pay his bills, or worse, isn’t keeping his skills current. It is very likely that he may run to techniques that in the past didn’t help much, but now can get a site penalized. Maybe he gets a bump for a couple of months before the penalty sets in. He collects his easy cash and moves on leaving the clients with a penalized website and no where to turn.
If for no other reason this, clients should avoid pay for performance contracts because this puts the marketer in a position to do whatever it takes to get paid. And if you get penalized he can walk away and start over, you are left with a mess that may not be easy to fix.
What else could go wrong?
The list is pretty much endless, but here just a few of the things I have seen happen on both sides.
- The marketer just isn’t that good or just starting out
- The client decides to “help” by hiring some guy to get them 200 links for $49.95
- The marketer doesn’t care about the company culture
- The client makes changes to the website without discussing them first
- The marketer makes changes to the website without discussing them first
- The client doesn’t “pay” so doesn’t understand the work involved to win
- The marketer walks away without warning or comment
- The client didn’t have any money to begin with, what makes you think they will when you are done?
How Do Other Industries Deal With This?
They don’t. Look at any other marketing venue out there. Radio, TV, phone book, billboards, car wraps and skywriters all expect to be paid for the work that is done. The do NOT promise success. They promise that they will do the work that they are hired to do. Nothing more. And this is what internet marketers should be doing. But they have an advantage.
A good online marketer can document how her input to your business has improved your ROI. None of the other methods can point to a specific thing and say “I’m why you made that money”, they can’t do it. A good internet marketer can.
How to structure a fair deal
If even after all of this you still want to do a pay for performance deal here are some things to keep in mind when setting up the deal.
Always make sure you get a minimum monthly fee. If for no other reason it gets the client used to paying you every month and it’s not a huge shock when 6 months from now you start getting paid a lot more.
Put a cap on the monthly fee. Your goal should not be to make millions from one client, an upper limit to what you will be paid is a fair way to keep the client working with you and not running off. A progressive percentage of sales is a great way to do this.
Make sure that you have the authority to make the changes that need to be made. You can’t work on a pay for performance deal if the client is constantly blocking your efforts.
Make sure that the client understand this this type of deal removes the control of their website from them and that anything they want to do must go through you.
Make sure that you really want to be this client’s partner. Because that is what you are. Your success is directly tied to his and you need to be able to work together through the rough times as well as the good.
Would I do this again?
Maybe. But it would require the right deal with the right client. And it definitely involved a real partnership where I was made a part of all business decisions. I would also demand a 100% free hand with everything online.
Lot of wisdom here, Steve. I agree that in most cases a pay-for-performance approach is simply not good for either party.
Getting paid for the actual work done is still a bit tricky. Not the “getting paid” part, though that can be trick, but the defining of and understanding of the “actual work.” This is the part where most clients, understandably so, don’t know the value of the work being proposed, aside from potential results (i.e. ROI). It’s made even trickier because the person or agency isn’t working off a defined standard (what is SEO work?).
I think some performance based incentives can work for both parties. I’m more motivated to start proposing a mix of both to clients as a way of sharing the risk/s of the unknown.
One pushback on a point you made regarding attribution. While I agree that it’s much easier to make the case for attributing ROI to specific online activities (vs a billboard for example), it’s still not an absolute. I’m far from being an expert on multi-touch attribution, but I know enough to know what I don’t know.
For most small businesses with a very limited budget, things like tv and radio advertising is simply too speculative. There’s so much that can be done online that provides reasonable proof of attribution. It seems foolish not to exhaust those opportunities first.
I completely agree that performance based incentives can be a good thing. My issue is primarily with the people that want “free work” until some point in the future when they are making more money. This is asking me to invest my time and money in their company on the hope that in the future I will get that time and money back. I reserve that type of work speculation for my own projects where I own 100% of everything.
My business is different but, despite my confidence in my own abilities and skills, I’ve politely declined every offer to deliver services in exchange for a percentage of income from that project at a later date.
My “product” is time. If I do not have 100% control of the variables affecting the future income, why should I donate time to their project? It’s almost rude of folks to ask. Would a start-up theater company get free rent from a landlord based on the promise of a percentage of their future success? I think not.
There are sites for raising funds to use to grow a business. Aside from a Small Business Administration Loan, we have crowdsourcing sites like Kickstarter and IndieGoGo now.
If it isn’t clear, I’m agreeing with you, Steve. Thanks for putting this post up. It is a good article and you obviously put a lot of thought into it. For those among your readership who are willing to take performance based contracts, you lay out some good tactics for structuring a contract that is fair for both parties..
Excellent post, Steve! I’ve only been asked once to take work “on the come” (and declined). I have offered to do some initial work at a significantly reduced rate, though, when backed by an eventual contract at my normal rate.
Like the saying goes: “If you loan a friend $20 and they avoid you to keep from paying it back, it was probably worthwhile.”
If a client is going to try to screw you after you’ve made him more money, you’re probably better off without him.
This happened to me once
“The client decides to “help” by hiring some guy to get them 200 links for $49.95” I had a greedy client, everything was going good, until they hired other SEO without my knowledge, to push more, the result the website got penalized by Google. 🙁
This is a huge issue in most businesses. If 1 chef is good, 8 chefs must be great!!
On “If 1 chef is good, 8 chefs must be great!!”
There is a great book on that called “The Mythical Man Month”, you can still get it on Amazon.. The title says it all….
Required reading IMO for all software or marketing contractors..