March 20, 2021

Reader question about performance-based fees

Fellow list member Peter Petro wrote in to ask (shared with permission):

My realm of consulting — start ups, music industry, tech, Live streaming — often involves splits on commissions or finders fees depending on how a project or event might come together. You often have to very quickly assess how much value you bring to the revenue, sales or creative and lobby for that in the deal.

It would be interesting to hear your angle on navigating shared revenue, marketing, and packaging.. even if it’s not specific to my space it’s great to hear your point of view

— Peter

Whether we’re talking about finder’s fees, contingency fees, sales commissions, revenue sharing, et al... I don’t think there’s inherently anything wrong with any of these approaches.

That said, they are riskier than up-front pricing and therefore should consistently result in greater reward for the seller.

In other words, if you are using some kind of contingency fee model but constantly feel like you’re being undercompensated, then you should probably make a change.

That change could be one or more of the following:

Or, you could try a hybrid approach.

For example, let’s say you’re a golf pro who teaches people how to improve their game.

Here are three ways you could price your services:

  1. $100 per lesson
  2. $50 per lesson + $5,000 if handicap goes down by 4
  3. Free lessons, but $25,000 if handicap goes down by 4

Notice how the risk and reward change as you progress through these pricing models.

The first one straight hourly: low risk, low reward.

The second is a hybrid of hourly + contingency: medium risk, medium reward

The third is straight contingency: high risk, high reward.

Not incidentally, notice how much picker you’d be about who you worked with as you moved from 1 to 3.

With option 1, it doesn’t really matter how devoted the student is, you get paid to show up.

With option 3, you’ll go out of business fast if you don’t attract golfers who are deeply committed to improving their game.

Which leaves option 2 - the hybrid approach - somewhere in the middle.

Here’s the thing...

Whatever flavor of contingency fee you’re considering, they all come down to one thing: balancing risk and reward.

If you can reliably deliver positive results, and the upside for your clients is very high, then contingency fees might be a great model for you.