If a customer offered you a 20% commission on all sales of their product, sold through a funnel that you build, should you work with that customer?
Commission or revenue share models are a great way to price your business and we’ve had a lot of success with them at our agency, MeBox.
However, we’ve also made a lot of mistakes and the process of revenue share/commission can be a double edged sword.
Revenue share and commission based funnel projects, can sound like a brilliant idea. It lowers the barrier to entry for the customer, decreases the investment needed from the customer and could provide you with a growing source of income that scales faster than your own business.
The problem comes when the revenue share or commission, isn’t profitable. There is an old saying that 10% of something is better than 100% of nothing. Unfortunately, many commission based funnel projects can fall into the latter.
In order to understand if a revenue split, revenue share or commission model (potentially even an affiliate model) would work for your funnel business or funnel projects, you must work out what the profit would be if they were paying for the project themselves.
The revenue split model basically means that you take a percentage of each sale made via your funnel. The figures range anywhere from 20% to 40% but we have seen as low as 5% depending on the product.
For example if we were to build a marketing funnel for customer who sold books, at around $15 per book, using our funnel for every sale made we could collect 40% of that $15 sale. Yielding us $6.
If we sell a hundred books, that’s $600. You can see that maths was a strong point of mine during school.
However that’s hardly going to break the bank or be a viable option to replace your entire funnel payment model.
There’s a misconception that revenue shares or revenue splits are a) easier sales to make and b) always profitable for the funnel builder. What we’ve learnt at MeBox is that revenue shares only work if the revenue share model is still profitable.
This might sound obvious but it can seem very enticing to get 10%, 20% or 40% on every sale made, when you’re not selling your own products.
I want to share with you some of the maths and points we take into consideration when creating a revenue split or commission based pricing model for our funnels.
Is it profitable?
First we need to understand whether the project is profitable. Let’s do some super basic maths.
So here we have an example of two different funnel projects.
On the left-hand side we have funnel 1 which is a project costing approximately $25,000. On the right-hand side we have funnel 2, which is our revenue share option.
Before talking to a customer about a revenue split or agreeing on a revenue split, we must understand whether the project would be profitable for us to do as a revenue split model.
Let’s assume we’ve gone through the discovery process And deep dive consultation. We know enough about the funnel project to understand how much it would cost us and we’ve arrived at the price of $25,000.
If you want to learn more about how to price a marketing funnel properly and accurately, make sure to check out our free webinar on pricing a marketing funnel here.
The price of $25,000 estimates the cost of the project to us (developers, designers, hosting etc.) to be $8500. Our overheads during that time are also $8500. The profit we would derive from this particular project would be around $8000.
Let’s say we also have them on a recurring revenue maintenance and marketing package priced at $350 per month. That generates us $4200 per month, using the same rough 30% profit margin as above, that would give us a profit per year of $1260.
In total for the entire project and for the year we would generate a profit of $9260.
You need to know, more than anything, how much your costs are, how much the cost to the business the project would be (new staff, outsourcing, content and your consultation time), and how much profit you are expecting to make on each project. At Sell Your Service we estimate a healthy profit margin on all funnels and services to be around 30%.
You have to know exactly how much the project would generate you if you weren’t using a revenue split or share model. Because we’re going to compare that to a revenue split model next.
Next let’s look at funnel 2. One of the biggest misconceptions is that revenue split projects don’t require any upfront costs. Frankly, the idea that you would not only front the costs to the funnel as well as run, maintain, develop, design and launch a funnel for a product that isn’t even yours is ludicrous.
Which is one of our first points, we insist that every single revenue split model has a “cost covered” price line. Even if we are doing a 40% revenue share, we will insist that the customer still covers the cost for the funnel.
We can’t work for free and the customer has to have some kind of investment. They have to have skin in the game.
Assuming our costs are the same for the same funnel, the cost to the customer would be $8500. This would cover getting the project off the ground. Overheads and profit should be covered by the revenue share.
This means that the combined figure of the overheads and profit needs to be over $8500 plus $8000 for the overheads and profit. Giving us a combined figure of $16,500.
This means that if we are working for a 40% commission, or 40% of sales. That 40% needs to be higher than $16,500.
Which means that the total sales generated by the product needs to be around $41,250. If our marketing funnel generates $40,000 in sales, we will take 40% of those sales equating to roughly $16,000.
This means that the project would have at least paid for itself and still generated us a 30% profit margin.
But let’s also look at our recurring revenue profit and costs. Assuming the maintenance and care package would be the same at $350 per month we need 40% of sales to be over that $350 per month in order to cover our costs, contribute towards our overheads and provide us profit. If we are not taking any maintenance recurring revenue from the customer, the sales need to make it.
So this means that of all the sales made 40% of the revenue needs to cover the cost of the maintenance plan for the customer. It does not mean it covers the cost of the maintenance plan for us. We are replacing the $350 a month maintenance fee with our 40% commission.
So this means that at $350 per month, equalling $4200 per year. 40% of sales must be over $4200 per year. This gives us a combined total sales of $10,500 per year.
If the sales equates to $10,000 per year at 40% commission, we will be able to provide a maintenance package and generate profit.
Of course this also means that if we were to go to $20,000 per year in sales we would be generating twice as much and our profit margin would become much fatter and healthier because we still providing the same services.
This can all seem too good to be true, but in our experience it’s actually very rare to find businesses that have the ability to launch like this. And I’ll tell you why.
What are you working with?
What does the customer have in terms of resources and foundations, which means you will be able to generate close to $50,000 in sales per year for their business?
We need to have a real hard look at whether they are able to ramp up to those $50,000 in sales, through a marketing funnel which you’ve built, to beat profit margins that you could have made if you had just sold them the funnel with a standard pricing model.
Imagine the customer for funnel 1 having an email list of 10,000 people. In order to cover the costs of the entire project and maintenance fees they would have to generate roughly $30,000. Which would be $3 per email subscriber. If they are selling a $1000 product, that means they just have to make 30 sales/10 000 subscribers, and they’ve covered the cost of your funnel for the entire year.
It also means that next year when they generate 30 sales again at $1000 their profits are much higher as they don’t have to pay for the funnel project in the first place, they’re just paying for the maintenance packages.
Imagine that same customer offering you a revenue share model for a marketing funnel. If we are being conservative and offering to attempt to generate $0.50 per email subscriber per month, that gives us $5000 per month. In reality we found that each email subscriber is in fact close of worth to $1 per month.
At $5000 per month the customer for funnel 2 would be paying us 40% of $5000 per month. Which equates to $2000 a month. Or 40% of $60,000 per year, which equals $24,000.
We worked out that the total sales required for the year for funnel 2 was around $50,000. At $60,000 we would be a little over our target. Which is great news.
Imagine we could generate $1 per subscriber per month, which would generate us $4000 per month from $10,000 per month. (10000 subscribers @ $1 per sub per month = $10 000). This would be an even healthier profit margin for us and be an incredibly lucrative deal.
Do you think you could take on that kind of project?
Now imagine a second customer who is also offering us a commission deal based around funnel 2.
They don’t have any email subscribers. They don’t have any website traffic. They’re starting from scratch and therefore don’t have a lot of money so are willing to offer you a higher commission rate in exchange for lowering your prices. Why? Because they knew they feel they don’t have the funds available. So they’re hoping to exchange equity in lieu of payments.
That means that you would have to generate an email subscriber list for them from scratch, generate profit from each one of their subscribers and generate revenue regularly from each one of their subscribers and continue to grow their business. Assuming they have a traffic budget it’s possible that this could work out to be profitable for you.
However in our experience we’ve had to work extremely hard with customers like this in order to grow their business.
Essentially what they are giving us is 40% of their business in order to grow their own business.
How long will it take to get to a profitable goal?
How long would it take for either one of these customers or either one of these funnels to be profitable for you? Funnel 1 would be profitable during the project. Followed through with the same customer would be profitable within the first year.
Funnel 2 under a commission model, using customer 2 who doesn’t have any resources, email subscribers or traffic light take much much longer.
Again in exchange for 40% commission or revenue split, it can seem very appealing to think that in “three years time this will be a money making machine”. But in fact what you’re doing there is x-ing your costs by 3.
You need to be very careful about understanding how long it will be before a project is profitable.
Pro tip: don’t use their revenue projections and financial/sales projections as a measure of what they expect to make. Use numbers that you see on this blog and talking to real funnel builders to understand how long it takes to get the company profitable.
Typically a company doesn’t make any profit for five years. If they’re actually giving you 40% of their revenue it will take them even longer to get to profit. Do you want to make that kind of commitment?
If you do look at their revenue or sales projections apply the 4X rule.
The 4X rule states that any projections made will take 4X as long, produce 1/4th the results, for 4X the energy and at 4X the cost.
I’ve actually had prospects and leads argue with me about their sales projections,telling me that “our business mentor and bank manager think these are realistic” when they have absolutely no evidence to suggest this. If they are correct, fantastic!
But instead I have found the 4X rule to be highly accurate when predicting the growth and sales of any business.
Remember, any future results or projections will take 4X the costs, take 4X the time, produce 1/4 the results and require 4X the energy and effort.
Beware the funnel customer paradox
Here’s what happens with the funnel customer paradox. As soon as you take 40% of a customer’s revenue, business or equity. They will NOT start to only do 60% of the work. That seems the logical explanation, right?
If you are doing 40% of the work for 40% of the revenue, shouldn’t they do 60% of the work for 60% of the revenue?
In fact I have often found it to be the case where customers will do far less work as soon as they believe that a marketing funnel builder is working with them. They begin to pass the buck and effort onto you as the funnel builder as to why the business doesn’t work.
Some businesses we’ve worked with (I should say have the privilege of working with) have continued to put in 100% of the effort to build their business up. Making phone calls, booking meetings, generating content and producing products. Understanding that I can only add 40% to what they are creating.
If they are producing 100 units of energy, and I am only producing 40% of that, then surely it makes sense for them to put in 100 units for me to produce 40?
Instead, what many customers start to do is put in way less effort to believing that you are going to take care of absolutely everything for 40%. It’s as if they think that you are now on a salary and they can relax why you build their business. Unfortunately there is no way to qualify out these customers entirely. You’ll have to go in your gut feel, experience and remember to work the maths.
How does it work?
Revenue share-based businesses can use software, platforms or just simple calculations to pay you per month or on each sale. For example some of our lower cost products from customers are paid on a percentage split via Stripe.
Whenever we take a sale from $19-$1500, Stripe will automatically (via a WordPress plug-in), send us 40% of that sale. The other 60% going to the customer’s bank account.
However some of our businesses work on revenue projections whereby we have an overview of how much was made per month and we essentially invoice for that amount.
Future recurring costs
Something to bear in mind when building out marketing funnels on commission or affiliate basis, is the recurring cost to you. You have to understand that you are now taking 40% of the risk, as well as the opportunities.
Platforms could increase their costs, advertising costs could go up, or any number of problems could squeeze your margin.
Lots of people believe that the 40% commission is “free money”. But you still have to work out a valuable price model in order to cover your future recurring costs. Support, maintenance, updates and content are the exact same costs that people would have to pay for anyway. Do your recurring income figures at whatever percentage for your commission you take, cover the future recurring costs?
Easy to sell does not mean easy to work with
On a final note it’s very important to understand that easy to sell does not mean easy to work with.
There is a misconception that if we offer someone a commission or revenue split model for working with them, then the offer appeals more attractive.
In actual fact, I believe if someone was to offer me a marketing funnel project which would guarantee me 100 new customers at $1000 per year (equalling $100,000 per year), I would happily pay $40,000 upfront for that.
Instead, many businesses try to offset the initial upfront costs in exchange for a revenue split model. You might think this looks more appealing to many businesses, but you have to remember the types of businesses and people you are attracting with this kind of model.
Just because it’s an easy sale does not mean it’s an easy project. The offer of a marketing funnel for a commission split, therefore reducing the initial upfront costs might sound very appealing. But is that because they want to partner with you and work with you for future? Or is it because they want to lower their risk and lower the investment because they don’t have much to work within the first place?
Pricing marketing funnel is very very difficult. If you want to learn more about how to price a marketing funnel effectively and efficiently click here.