Pitfalls of Performance Marketing or Revenue Share Marketing

I’m proud to say that we’re one of the few consultancies to provide Revenue Share agreements across marketing and sales campaigns with our clients. In an agency world of Pay Per Lead (PPL) and payment based on a percentage of Paid Advertising Budget, we’ve succeeded in often negotiating and aligning interests with our customers and partners around mutually beneficial outcomes. 

I’m equally ashamed to say that we’ve had more than our fair share of poor investments. Poor investments in companies, clients, and partners that we failed to properly assess and set up for success. 

We don’t have a magic bullet for making money in the marketplace. We have some tactics, techniques, and tricks—but ultimately a profitable business is a marriage between marketing, sales, and operations. Quality companies must stand on three legs and walk in the same direction to get anywhere. 

Often times our failures have been caused by a stumble in the three-legged race between sales, marketing, and operations. 

Other times, our victories have come from our ability to learn, assess, and interpret a client’s business—change how we communicate with customers across the board—and reap the rewards. 

Common Marketing Agency Engagement Models 

Understanding how agencies charge for their time is critical to the negotiation process. An agency is almost always charging for the time of their resources, plus some margin for sales, marketing, and profit of their business. It’s considered expensive mainly because when you’re working with consultants, you’re working with experts in their respective industries equipped with specialized knowledge across industry verticals. 

  • Time and Materials - standard billing rates applied based on the time spent, and the materials used in the delivery of services. 
    • There is no risk for the agency in this model, and this model is most common.
    • Typically, a client can expect this model when measured outcomes are intangible towards sales and the work done is more infrastructure for the business. E.g. new website design and site build, or web application development. 
  • Retainer + Commission - flat monthly fee plus a commission as certain targets are hit. A long-term engagement between agency and client benefits in that measured outcomes are aligned, and an agency is incentivized to perform.
    • It is important to understand that an agency will typically offer a discount through a long-term agreement alone. 
    • Additionally, offering a commission structure does not guarantee a discount on the hourly rate of services rendered—meaning that an agency may not put in more work to your campaign. 
  • Pay for Performance - commission payments based on the performance of the campaign. Some examples of this are pay per lead, or commission based on sales for a specific channel. 
  • Revenue Share - a percentage of revenue is shared based on total sales. 
    • A revenue share agreement typically is limited to a specific channel.
    • As a business owner, you may want to limit revenue share to specific campaigns you are executing with an agency partner, however, it often proves too difficult to attribute all sales to campaigns. 
  • Profit Share - a percentage of profit is shared based on total profit.
    • A profit share agreement is typically limited to a specific channel.
    • A profit share agreement is fairer when considering the holistic performance of the business. 
    • A profit share agreement takes into consideration the costs in marketing, sales, operations, and delivery of products or services. 
    • This model is complicated by negotiations of the formula for profit. For instance, you may need to determine if bonuses paid to employees are included or excluded in company costs. 
    • While this model is similar to a partnership, a profit share agreement can be terminated without excessive legal ramifications as it would with business owners or partners in a joint venture.

The pros and cons between these engagement models are highly situational. Depending on your project type, business model, market conditions, and more—performance marketing may or may not make sense.

Timeline to ROI for both parties is often critical and rarely understood. Let’s talk a little bit about cash flow and the processes that need to be in place to drive strong engagement.

Common Pitfalls with Performance Marketing 

  • Revenue Share and Profit Share agreements have a lengthy negotiation process. In order to get a sound Revenue or Profit Share agreement, you must come to terms on:
    • Formulas for calculating profit.
    • Appropriate milestones and cliffs for payout.
    • Terms for performance pay.
    • Rights to audit the other party’s books.
    • Protections for the agency so the client pays an appropriate fee for taking a channel in-house once all the momentum and processes have been built up. 
  • Difficulties sharing bookkeeping. Organizations accounting and books are not ready to share with a third-party via revenue share or profit share financial audit. 
  • Imperfect understanding of timeline to ROI. Since the agency is technically making an investment in the client’s business, they need an understanding of how long it takes to acquire a lead, convert them, and then NET pay terms—plus any risk of refund on warranty.
    • For example, if you’re an agency investing in a performance agreement with a B2C eCommerce business—the timeline to ROI is fairly short term. It probably consists of a broad audience campaign, filtered to retargeting campaign for nurturing, and then once converted the cash is almost instantly in your client’s merchant account.
    • On the other hand, if you’re an agency investing into a performance agreement with a B2B professional services or SaaS model business, there may be more complexity with the timeline the client’s sales team is negotiating contracts, getting a PO, getting a check, delivering services and exiting the warranty period. 
    • The best models are performance agreements around recurring revenue. These can be B2B SaaS, B2C SaaS, eCommerce subscriptions, or content subscriptions.
  • Campaign costs are easy to attribute to any performance pay model, however, these costs are rarely the entire cost of sales on a given channel. 
    • Note for agencies: You’ll spend time negotiating with clients who feel that part of their cost is paying a sales team or a commission to “the guy closing the deal”. Your goal here isn’t to remove that persons commission, but to demonstrate that the skill of getting leads for that sales guy is deserving of its own commission. Separating these concerns as two separate items is the best path towards an amicable resolution. 
    • Note for business owners: Make sure you come to an agreement on margins that differ between operating, sales, and marketing costs, as this split can influence the perceived profitability of your performance engagement. Remember that your agency partner is investing their profit margins to help you succeed, they should get multiple returns on that investment. 
  • Negotiating formulas can be very time-consuming. Calculating revenue attributable to the campaign, or costs attributable to the campaign is critical to the profit of both parties. Unless your formula is vertical-specific or self-contained and easy to track (e.g. App installs from Social Advertising), expect this to take some back and forth.
  • Pay Per Lead is easier to negotiate. Most companies understand the concept and there may be a precedent in the industry. However, companies need controls for the quality of leads. Agencies need controls for timeline commitment and total ad spend to ensure profitability as it takes time to ramp up campaigns and without significant investment, the juice may not be worth the squeeze.
  • Cross-channel attribution is typically impossible. You can cover/mitigate loss for cross-channel attribution by negotiating different performance commissions based on channel. 
    • An example here would be a retargeting campaign for contacts already in customer’s CRM. Most savvy business owners think of those customers as already acquired assets and therefore would not want to pay you as much commission. That doesn’t mean retargeting should be excluded, just that it should be considered separately.
  • Agree to an Attribution Model. Payouts based on the Last Conversion are easiest and the default, but the agency will lose out on commissions if a customer that was acquired on social advertising later converted through email marketing. 
    • Determine if First Conversion or Last Conversion makes the most sense.
    • Ensure that the right technology and analytics are already in place before you start. 
    • Determine if you’ll have different commission structures based on attribution models. 
  • Be careful not to make the calculation too complex, as it will be too difficult to audit if both parties have a disagreement.
    • The best way to avoid this is to invest the time at the beginning of the engagement to build the reporting analytics that will determine the payout. 

Each model is a balancing act between client quality controls and agency scale and timeline commitments for the budget. Performance marketing wins for agencies in the long-run, but need long term commitment from brands in order to give agency enough time to recoup up-front investment costs for building out the positioning and funnel. Conversely, a company that continues to pay out their profit margin to an agency that makes a high commission, will likely start looking to build expertise in-house within a few successful quarters of performance. 

At Facet, our goal is to create new channel campaigns, operationalize and automate them—then pass them in-house for reduced operational cost. We typically seek to reduce our commission at that point and create space for the next channel. This allows both agency and client's company to grow without excessive commission collection. 

Goals with Selecting a Performance Marketing Agency

Now that you are equipped with an understanding of all the pitfalls of revenue share and performance marketing and sales negotiation, here’s how you can prepare to select a partner for your mutual opportunity and benefit:

  1. Align your project with an agency’s expertise.
  2. State clear, measurable outcomes to determine the success of the campaign.
    1. Set out clear breakpoints in agency engagement. Whether those are based on a timeline, milestones, or budget—make sure both parties agree to the decision points.
  3. Understand the limitations of the engagement. Is your agency set up for the initial strategy work, or for operationalizing the long-term campaign optimization? If making a large up-front investment into branding, is it reasonable to include in a performance engagement or should some work be covered under a simple time and materials agreement?
  4. Select the best engagement structure to align outcomes. You want your marketing agency to be incentivized when you do well. You also want to be clear on your target ROI to keep investing in the relationship and campaign. 

Still not sure where to go to get the best performance? Reach out to us and we can put you through our performance marketing workshop to see if your business is staged for growth.