Revenue-share projects can be extremely profitable for consultants, but they can also be incredibly risky. It’s important to know how to evaluate the risk of a revenue-share project before you take them on.
I recently was offered a significant revenue share deal. The client didn’t want to invest anything upfront, he only wanted to pay us from the revenue that would be generated after the product launched. So in this case, our team’s payment was based on assumption that the promotion was going to be successful.
These opportunities can be incredibly lucrative, and they can also be incredibly risky…
It’s important to evaluate the level of risk and to be clear on your own risk tolerance. If you’re struggling to get consistent income,and you have a mortgage, kids, or other financial obligations, sometimes taking a risky deferred income opportunity may not be in your best interest.
So how do you know if you should take on a revenue-share opportunity with a client? How do you objectively evaluate the risk of these revenue-share projects?
I typically look at 4 factors to evaluate the risk:
1. Trust In The Client
First and foremost is trust. I look at the relationship I have with the person that’s making the offer. When you enter into an agreement like this, you need to trust that that other person is going to be honest about their expenses, be honest about their revenue numbers, be transparent and allow you to see into the back end operations. Do you trust that they’re going to hold up their end of the bargain? Whether it’s a certain minimum amount of ad spend they’ve committed to, or the addition of specific resources – do you trust that they’ll follow through? Do you trust their track record? Do they have a history of successful launches or successful marketing campaigns or is it one failed idea after the other?
You have to have the trust in that person and that person’s ability and in their team’s ability.
2. The Offer
The second thing I look at is the offer. Is it a proven offer? Have they sold it successfully in the past or is this brand new, yet to be tested with the market? There’s a lot more risk in an unproven offer. I’m less likely to take on a project with an unproven offer that hasn’t been validated by the marketplace because I know more often than not, it’s going to take longer to get those conversions.
3. Project Variables
Next I evaluate all of the variables of the specific situation. I look at how many team members are involved, how many other people I need to count on to do their part. I look at the traffic sources, the client’s list size, affiliate partners, profit margins, the cost structure, ad budgets – all of the conversion metrics that are available. I need to look at all of the things that are out of my control and all of the moving pieces of the project that need to work together to get the results we want.
Every project is different, and it’s important to evaluate every opportunity on its own merit. Look at all the things that they have going for them, all the assets, all the gaps.
4. Your Risk Tolerance / Opportunity Cost
Last but certainly not least, I look at my risk tolerance and my opportunity cost. From a financial standpoint, if you’re a freelancer or consultant and you’re relying on client work to pay the bills, you need to take a look at your current portfolio. Are you able to spend 20 percent of your daily allocated billable hours on a project that you’re not getting paid for upfront? What other opportunities do you have that would occupy that space on your calendar? What’s going to be the best use of your time?
Along those same lines, it’s important to know the maximum credit line that you are going to extend to someone else on these projects? This was something I learned the hard way. I had accepted a revenue-share project for a large ecommerce company and we spent hundreds of hours building this massive platform for them to distribute samples and sell leads and unfortunately, they didn’t hold up their end of the bargain. They didn’t market it and didn’t take care of the operational side as well as they could have. At some point had to make the decision to stop working on the project. Their credit line has been maxed out. It’s important to know your maximum credit line that you’re willing to extend a client. Billable hours or not, there is an opportunity cost. Costs as to where you’re spending your time. So before you get into a situation where you’re looking at this back end revenue or profit share agreement, think about your credit line. What’s your limit?
While everyone talks about revenue-share deals as being extremely lucrative and the “holy grail” of consulting engagements, they can also be extremely taxing and risky, so it’s important to go into these engagements with your eyes wide open to protect yourself and your business.