Client wants to pay a percentage of revenue generated by website

Question

I recently came in contact with one of my Dad's friends who is looking for a website. This guy gave my Dad a job when we first moved to California and has been a really good "family friend" ever since.

He has gone off on his own new venture where he is selling items on eBay (and supposedly making a good amount of money from it). I don't know exactly what he sells, that's something I'm going to discover soon.

My dad spoke with him recently and he said he is looking for a new website to sell his items and wants to pay me a percentage of all the money he makes from the items he sells.

I'm hoping someone here will have a similar experience and can elaborate on what they did. Does this sound like a bad idea? What kind of contract would I have him sign to make sure I am actually getting my money? How do I know if he is actually paying me the correct amount?

Answer 1

Don't do it.

If there were actually a prospect of the site making any real money (thus commissions being worthwhile) the guy wouldn't be offering to pay you in commissions. He's offering this payment structure because he knows the return on commissions will be far less than any standard fees you may want. In general, those offering this type of structure don't have enough faith in their own business model to pay for your services up front. If they did, they'd realize in an instant that paying any fees you have directly would be more cost effective than giving up commissions. TO be fair, many would-be entrepreneurs may also see the commission structure as "Hey! I won't have to pay him/her anything until I start making money." It may not be a malicious offer, however it's generally not a good offer unless the site/project is already making money and there are already figures for what your commissions would be in place.

If he insists upon a commission structure you need to alter it to ensure you get paid enough to compensate you at least a little. A flat fee per month plus commissions. But even then only do that if you really want to do the project. It may be better to lower the initial project fees and supplement that with commissions. For example... standard project fee minus 30%, then 5% royalty on all sales.

Working solely on commission creates an unstable client relationship in my experience. If the site makes no money, you make no money. What if the client wants you to spend 60 hours changing the site in order to increase sales? You'll be doing all that for free. What if the site merely trickles in sales and your commissions are less than $50 a month? Are you going to feel it's worth spending time to improve the design in order to increase your commissions? Realize that this may be a "hobby" for the owner, a simple secondary income venture, while in most cases it may be your primary job or source of income. So your needs may be much greater than your clients. He may be okay if the site goes 6 months without making a dime. Would you be?

If you really want to get into commission-based payments for a business site you should be treating the site as any investor would. Because, make no mistake, he's asking you to be an investor in the business. Not in terms of venture capital or direct money input, but investment in terms of your time and work. However, that's still an investment position.

What's the business plan?
What's the anticipated user base?
What's the cost of user acquisition?
What are the monitization methods?
What's the rate of user decay?
What are the projected sales for the first month? quarter? year?
What type of products is the site selling?
What's the current market demand for those products?
How are sales for the current (ebay) system?
How much time, each month, is anticipated to be needed on your part?
How long can you expect to wait before you recover your costs?
Do you like the business?
Is it something you want to be involved in?
Are you willing to work without payment in order to try and improve your returns?

Most web designers/developers get approached with "partnership" or commission structures regularly. These ventures do not pay well 99.9% of the time. If you think you've got the something in that .1 percentile, go for it. But be aware the odds of you getting paid even your base rates are stacked against you.

As for "knowing he's paying you the right amount".... as an investor (because that's what you would be) you should have the right to view sales for any given period and those amounts. Put that in a contract. If he's unwilling to do that, then don't walk, run away from his offer.

Answer 2

You need to decide how complicated the site is going to be and how long it will take for you to get it up and running. Also, will there be any hosting/bandwidth costs, maintenance, etc.?

If it's nothing complicated and you can live without the money then by all means go for it, but it's a risky way to earn a living.

Get him to show you his trading volumes for the last 12-18 months and explain his business plan to you.

Personally I'd treat this as a franchise deal - you build and own the shop (design, code, domain, etc.) and charge a fixed/percentage amount for each transaction - consider the website as your 'seed investment' - if you don't get paid you always have the option of taking the site off-line.

Answer 3

Working for future commissions from sales amounts to working for free. My recommendation is to figure out how much value the website would provide to your clients, how much time and energy it will take you to create the site, and give them a quote based on that. If they balk at your proposed terms, then they most likely have no intention of paying you ever, or profit sharing.

Even if you do not have a long client history, aim for clients who value design and understand that building a website requires a budget.

Answer 4

When dealing with projects like this that are based off of a commission, and no actual upfront costs, you need to remember a few things: if this site isn't making lots of money, you aren't making lots of money. This usually deters most people from following this model.

If you are taking the risk, you need to remain in control; this includes for hosting. If this is one of your first projects, make sure you know how much your "business" is going to cost to run, and make sure you can guarantee that kind of income with this site. For example, for a small site that is estimating to make $500 per month, and you're being offered 10% of the sales, you are only bringing in $50 per month! It's not guaranteed income, but it could also go much higher, depending on how well you market it, and your customer's product.

If you are experienced, then this type of risk can be worth it; usually, you'll have a good hosting company, you may be able to combine products together to save money, and you'll likely have all the tools you need already at your disposal. I would definitely recommend against this approach for your first few projects, because the overhead can take a while to pay off, or to give you enough money to live off of. Yes, I've done it, and the first few times I lost money until about 2 years later when that project's bills finally became less then what I was bringing in off of it. The site has since shut down (product ran out), and I do not pay anything anymore.

You should also make sure that all the details are written out in a contract; the customer feels better because he knows he doesn't have to give you a cent until you deliver, but you want you money as soon as it comes in to your customer! Almost a catch-22.

What I recommend is:

• Write up a contract, dealing with how much, how often, you get paid
• Include an initial setup fee (i.e. $50 for the first year, just to cover hosting and a LIMITED amount of time working on the setup. Adjust as necessary)
• After you have "recovered" the initial setup fee, then start the commission. At this point, it shouldn't cost you anything to keep it running (except your hosting costs)
• Include an exit strategy. If the site is costing you too much to run, you need a reason to get out. If their products are not flying off the e-shelves as fast as they should, you need the right to abandon the cause

Good luck!

Answer 5

Since other answers have already told you the things which matter most, I can only add small things to their reply without repeating their words.

When someone tells you "make a website and I will give you a percentage of earned money", 99% of us would think they earned something when they get their first $100 or $1000. This is wrong. Once you have made a website and it's ready for publishing, you do not start from $0, but from -$(timeInvestedInProject × yourHourlyPriceInDollars).

That is, you don't start "earning" money from the project until your initial investment of time is paid off.

Now, the easiest thing is to say that you won't do it. And later, when the website makes $1M in two months, you will cry a river.

So these are the steps you should go through:

1. Evaluate the idea and see its earning potential. You are not a side figure; you are an investor into this project, investing your knowledge.
2. Ask yourself "Can I really make a quality website which will earn money?"

3. If you see potential and you can do it, then set up two types of profit shares:

   • The first type of share would be the higher one (e.g. 50%) until you get back the money you invested into the project.
   • The second type is the percentage you will get after you have made back your initial investment, when you're at a real $0.

If your father's friend rejects this idea, then just drop me a thank-you note; I saved you from a bad client.

Answer 6

If this is an e-commerce site, build a tracking system that reports to you when profits are being made. You can easily know what your share is this way. You might even be able to program it so a certain percentage goes into your account automatically.

Another option: Get him to change his business to include you as a partner. If this person is serious enough about the business, he should be willing to do it.

Consider your time to develop the site and the relationship you have with this person. From what you've said so far, you can keep things casual and without getting lawyers involved.

Answer 7

I've seen a lot of successful sellers on eBay trying to launch their own websites. I personally tried it once. After all, it makes sense right? You have a super successful eBay store and you think your products are the best in the market.

The only problem is (are):

1. Visitors to your store are visitors for eBay, they are buying something from eBay, with its protection policy in place.
2. Marketing and support are taken care of by eBay.

If you go ahead to launch your own e-commerce website, how will you handle marketing, what would be your returns policy, who will handle other logistics.

Since you are a web developer, you might already know that this business is more than just building the website.

Take my word, do this only if you would like to operate a business in e-retail sector. Do not do this just to recover your web development costs.

Answer 8

I've been asked this one before many times and I have been burned by this one before on a few occasions. (In my case I had a 30% share of said company, spent an inordinate amount of time "making changes" to the product. 300 hours later was a single sale made? Nope, requirements kept changing)!

I would say that in simple terms if they want to offer you a percentage then ask for 80% of the companies shares with a clause of limited liability (companies like this require special registration for tax purposes).

On top of this also ask for a minimum yearly dividend (let's say $20k).

They will turn this offer down fast...

Answer 9

Give him a choice:

• full one-time charge, or

• reduced charge (70% ?) plus percentage on the earnings, for a total limited to 200% of the one-time charge.

Answer 10

I know this is old, but I would do it as long as I liked the concept and felt confident that the site would generate revenue. I'd use a template to cut down on the time and definitely would prioritize cash projects. As long as you're willing to be invested in the growth of this business, I'd say go for it. Your success is entirely based on the site's success, so make it awesome if you're going to do it.

Answer 11

If you are newbie and need something to build your portfolio, do it for free. Make it fast, 1-2 days and quit. Take screenshot and put it into your pocket, forget him and move on, look for another good client.

A website can not generate profit from itself. It needs a lot of hard work from the owner.

Answer 12

IMHO the answer is not that simple, mainly because the mentioned website is about selling goods not services. The main problem in such situation is usually internet marketing. If you get commission you would like to see higher sale, obviously. BUT, online shop performance depends on many factors, where price is probably the most important but not the only one. If you know how to increase sale conversion AND can get legal paperwork protection for your commission (this is about business not about friendship) - commission could be probably better option.

To cut it short - if you are able to take over the marketing stuff (and you know it), it would make sense to choose commission.

But, I found, that usually customers have nightmare-like taste for layout, and sick vision about how marketing should look like (they assume that competitors don't exist for instance etc). So much depends how much you could control the marketing part of the project.