In the last few years we’ve had a handful of clients ask us to adopt a performance based payment model. Usually these are start-up companies who are cash strapped and looking for an alternative to paying our service fees. I’m intrigued by the idea of performance based web work however I’ve yet to find a model which I believe is both fair and incentive driven.

I’m still trying to find the right solution. I’m not sure what works best, but I have a pretty good idea of which models I think will tank. Here are a few situations which we’ve been confronted with.

Ecommerce Web Site
The client was offering us a small percentage of overall sales along with a partial reduction in our regular hourly rate. The client was hoping that we would be incentivized by the offer they made us. There are several problems with this model for both sides.

1. What about offline sales, phone calls, emails or faxed orders? We can track the online sales but we have no visibility into the offline orders.
2. How competitive is the product / offering? We have no control over the price of the product or which products are in-stock. We could dedicate plenty of effort building a great system but if the client’s products are overpriced or lack selection then sales revenue won’t materialize.
3. How much is the client willing to pay for marketing? Our agency can do the SEO / SEM work but ultimately SEM and online advertising incur real costs, and not just man-hours.
4. What is the level of marketing they are willing to pay for and who has final say in terms of strategy and creative?
5. Our team could sit back and collect commissions for the client’s sale efforts. That wouldn’t be right, but under this sort of arrangement it could happen. Or vice-versa where the client could get away with doing nothing but filling orders.
6. What is the cap on the number of hours we would commit to each month? If we are spending 80 hours each month and sales commissions only equal $2,200 then our effective rate would be $27.50 / hr. If we agreed on a base hourly rate plus commission then perhaps hours wouldn’t be as important.

Lead Generation Website
In this scenario a client approached us to reduce our rate in favor of a lead generation forumula which incentivized us for creating “qualified leads” in Salesforce.com. To complicate the scenario we would be working with the client and other third parties including an SEO firm, Content Writer, and a PR Agency. The arrangement gave us 4 tiers by which our monthly charges were either reduced or increased based on performance.

We had an existing retainer in place which discounted our hourly rate by 20% for the commitment from the client for a fixed minimum of hours dedicated per month. This proposed program would start us at a reduced rate which is 40% less then what we typically charge. From that, if we perform well enough, we could make 20% back, bringing us to our current retainer rate. On the other hand, if the performance dropped, our hourly rate could go down to 50% of our regular rates. In my mind that is not an incentive, it’s a carrot and stick.

The proposed formula work like this:
Qualified Salesforce.com Leads / Total Unique Visitors = % Conversion

Here are the problems with this formula and the overall scenario.

1. What if the budget for SEM goes up and the third party SEM company starts driving 15% more traffic, but the traffic isn’t qualified? It will dilute the conversion percentage.
2. What is a Qualified Lead? In Salesforce.com we can drive leads but the aspect of qualifying them is arbitrary. Ultimately, that aspect comes down to trust but it sure would be nice to remove arbitrary valuation.
3. The SEO & PR companies are going to have the highest influence of the company’s natural rankings. If these two players hurt or hinder traffic then we suffer as a result.

We counter offered the client a true incentive program which kept our retainer rate at a discount of 20% while suggesting the incentive to reach full rates if we exceeded expectations. If we knocked expectations out of the ballpark, then we would be rewarded with a 10% increase to our regular rates, making work in this client particularly attractive. Unfortunately that suggestion was not accepted.

Does anyone else have similar stories to share? In browsing the web I found these.

GraphicPush: Commission Based Payment for Web Design

Manifest: The First Step in Creating Passive Income