Since we made revenue performance based partnerships available for both new and old clients, we started receiving numerous questions about the pros and cons of these options. In this article I will explain how these options work, and in which cases it is a good option for clients.
Moving from retainer-based consulting to success-based partnerships
When we started our first consulting company in 2015, our aim was to offer cost-efficient yet valuable support services for hotels and resorts – filling up skill gaps and taking care of digital marketing management. For this, we charged retainer fees ranging between $1,000 to $2,000 monthly, depending on the tasks, level of involvement and responsibilities we agreed on. We always negotiated based on value.
As time went by, we started noticing that this pricing model has been limiting us commercially. Our larger clients started to make a 30x-40x return of investment by using our services, as our work generated around $1,000,000 per annum for some of them.
At the same time, new companies with huge growth potential but limited cash were often unable to budget for our services – so we had to miss out on several clients who were not able to pay.
In 2019 we have signed up a couple of new clients to test our revenue-based pricing and equity deals. The results were surprisingly good. Clients could start working with us a lot faster, without taking a risk or making any upfront investment – meanwhile, we were able to get more involved in planning, decision making and overseeing projects. Eliminating monthly payments have improved cooperation between us and our new clients greatly.
You might ask: how come these new clients do not pay monthly while others do? The answer is simple: in return of our involvement, we own a small percentage of their business or take a share of the additional revenue that is generated by our contribution.
From 2020 we are offering negotiable performance based business development deals, revenue-based partnerships and of course we keep retainer fees as an option for clients who prefer monthly fixed payments.
Equity partnership deals
Equity-based deals are probably the most attractive for new companies like travel startups, or hotels with limited resources in the pre-opening stage, where budgeting for retainer-based consulting services is not an option.
Depending on the level of involvement, projected earnings and number of shareholders already on board, an equity deal will make our company (Daniel Diosi & Partners) own a reasonable piece – typically 1% to 10% – of the client company. In this case, the client will only pay annual dividends – and buy out the equity when the partnership is over. No retainer fees or monthly costs will be involved.
We might refuse to engage in an equity deal if we conclude that the client is in financial risk, or it’s financial growth potential will not be sufficient to make up for the value of our involvement.
Revenue performance based deals
Revenue share based consulting deals are applicable in cases where the client is already generating revenue and profits. This option might be attractive for companies where giving equity or paying retainers is not an option. In this case, we will track the additional revenue originating from channels we support, and take a pre-agreed percentage of that.
With hotel clients, we typically take last year’s revenue as a base and consider the additional revenue as the basis of the revenue share payouts.
Typically we do monthly or quarterly payouts based on check-out date revenue reports. Depending on reports and forecasts , we normally negotiate to take between 10-25% of the additional revenue from the channels we work on – such as OTAs, brand website or direct bookings.
In the recent past, we have signed up a large, multi-property 5-star hotel client in Phu Quoc, Vietnam. During the negotiations we suggested two options: $2,500 per month retainer or a 5% share from the additional revenue of their online and direct channels. Our conservative estimations forecasted a $2,000-$3,000 per month revenue share payout, but soon after our cooperation kicked off their revenue jumped very high and they ended up paying above $5,000 monthly. Needless to say, the deal was renegotiated.
For commercially successful companies with already established revenue streams, paying a retainer is the best alternative – given the simplicity and low-commitment nature of monthly fixed payments.
Paying fixed monthly fees makes it a very easy to plan payouts and eliminate risk, opposed to revenue-based deals where the amounts will vary and might go unexpectedly high in some cases. For clients with large and cash-rich companies, we often recommend to choose this option.