question

An e-commerce company wanted to use our services, but instead of paying our agency a monthly retainer, they were interested in structuring a deal that would give us a percentage of the overall sales from our marketing efforts. Is there a benchmark percentage to use?

Jason Parks

Owner, The Media Captain

answer

I cannot offer a single benchmark percentage; but here is how I would develop a percentage of sales measure.

Break-even. Start by using a variation of the break-even formula: Multiply your monthly retainer by 12 to determine "fixed cost." Then determine what "overall sales" will be. Divide sales by fixed-cost to determine the payout percentage.

Arguments for this could be for a seasonal business that wants to use your services year-round but only has revenues for three or four months. Arguments against include disagreements down the road as to what sales can be attributed to your efforts vs. other activities and what constitutes sales: gross sales, or sales after promotional discounts and uncollectable accounts.

Time-value of money. To compensate for the extended payment terms, increase your retainer by 10 percent.

Risk-reward. What happens if sales exceed or fall short of expectations? If you are asked to bear this risk, you should look for additional reward and raise your retainer appropriately by another 10 to 20 percent. Alternatively, the client could "true-up" at six months or one year — thereby eliminating this cost.

Value-chain analysis. Your expertise is marketing, the client's is running the business. If essential value-chain activities are not performed well, no matter how successful your marketing efforts, there will be no sales. Are you being asked to backstop or oversee more responsibilities with this client than you normally undertake? Is this a role you want to undertake?

If it's a longtime customer, with a proven business, this could work. For a prospective client, I would probably pass.

About the author

Jonathan Seltzer is a professor of marketing at the University of St. Thomas Opus College of Business.