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In this time, one fascinating trend has come up time and time again. It’s not a huge percentage of the overall projects, but we probably here it once or twice a week which means approximately 2-4% of potential clients broach the subject.
“We’re ideally looking for someone to partner with us on the business and share in the upside.”
Today let’s unpack why here at Credo we do not believe that pay-for-performance projects like this are good for either side of the agreement.
Before we get into it, I must make a few caveats so that you understand where I am coming from.
- I am a professional marketer who believes in running a profitable business. This means consistent predictable revenue that we can reinvest back into growth, people, and impacting the world (or at least, the digital marketing industry) for the better. I think everyone should desire to have a profitable and growing business.
- My main business Credo, the site you are on, specializes in matching businesses with vetted expert marketing agencies and helping them hire.
- I have been in the industry full time for 12 years, and working around SEO/digital marketing/the web for 14 going back to my university days in Virginia. In that time, everything has changed. What may have been a good idea before may not be now.
- SEO used to be much more straightforward as an acquisition channel. Before Panda (low quality content) and Penguin (manipulative links), it was much easier to game the search algorithms. Now it is much much harder, and getting harder every day. Want proof? Look at all the former “black hat” SEOs who have gone completely legitimate/above the board because the super manipulative stuff stopped working nearly as well.
- I believe in paying market rate for work. Lowballing someone or trying to get free work (“can I pick your brain?”) belies weird power dynamics that don’t work out well for anyone.
- I’ve been mostly on the organic (SEO, content, PR) side of marketing for most of my career. In the last year approximately I’ve dabbled a lot more in the paid acquisition side of things. SEO takes a lot longer to work than paid acquisition, so there may be some times when pay-for-performance with paid acquisition makes sense. But that is by far the exception and not the rule, and definitely not the default or necessarily a good idea even if it makes sense (or could make sense) monetarily.
Ok, that was a lot of caveats. But now on to the meat.
Why pay-for-performance agreements are bad for clients
On the surface, pay-for-performance agreements can seem like a great idea if you own/run/work for a business that doesn’t have a budget to spend on hiring a top-notch firm.
You don’t have to put any money upfront and both parties get to share in the upside, with your business being the bigger beneficiary.
Seems like a great deal, right?
When we dig deeper though, there are many issues that begin to emerge.
- You will only get a percentage of the person’s time;
- Most who agree to this are only motivated by money;
- You still need budget really see improvements in metrics.
At the risk of putting words in mouths, these are the most common reasons I see that people seek to hire on a “performance” basis:
- No budget to hire someone, but you know that your company needs to grow;
- You’ve been burned in the past by a bad provider and this feels like a good way to protect your downside;
- You do not know what to look for when hiring, so you think this is a great way to “try someone out” before committing to anything.
While I am empathetic to all of these, the solution of “hiring someone on a performance basis” isn’t a true cure.
Should you be hiring at all if you don’t have budget?
If you don’t have budget to hire someone, then should you be hiring someone at all? I think no, and here’s what you should do instead.
The better way to approach “no budget” is to learn the channel “well enough” yourself so you can beging proving out the channel as a viable acquisition channel for you.
Then, take the money you make from that investment, include the cost of your time and thus what you’ll get back by hiring someone (say your business makes $50,000 per month, which means your time is worth $312.50/hr at 40 hours a week) and pay someone that amount to take this channel to the next level.
This is a bootstrapper’s mindset that will serve you well. Included in that mindset is to then move on to the next channel and repeat.
Burned in the past
If you’ve been burned in the past, then the solution is not to hire again in the same way with the same questions but the difference of this time not paying them.
Instead, learn how to vet them properly so that you don’t make a bad hire again.
As I say in that post, you are well within your rights to ask for:
- Referrals to other clients;
- Case studies of clients with businesses similar to yours that they drove results for;
- Examples of how they communicate with and report to clients.
I think about this like dating. When you exit a bad relationship, at first you are going to see what you want to see in future dates, and usually that’s the negative things from the previous relationship. But over time, as you date more people, you begin to see that those old wounds start to go away and you come away wiser.
The answer isn’t “never date again,” but rather to do it in a better and smarter way.
Going back to hiring an agency, this means doing it the next time in a better and smarter way. Instead of saying “it didn’t work because I paid them,” which you’d never say about an employee, instead look at the things they didn’t do well and make sure you look for the opposite next time.
Don’t know what to look for
When you don’t know what to look for but want to bias towards action, I’ve seen people take the route of “we’ll try them out and if we like the results we’ll keep working with them”.
Why take the risk of trying someone out and seeing if they can perform (even if you’re not paying them, you’re wasting time) when you can instead ask them for case studies, referrals to happy clients, and dig into their processes to understand what challenges they think they may face with your account?
Beyond that, there are a number of other issues with this statement.
First, “if we like the results” is a nebulous statement and when I hear it and dig deeper about what results they are looking for, there is rarely a good answer. The worst is “we’ll know them when we see them”.
Second, if you do not know if they can get the results then why would you hire them? Would you do this for a full time person? Hopefully not.
What you really need
Instead of seeking an agency who will work on a percentage of sales, what you really need is one of these:
- a partner in the business (with equity),
- to invest in your own knowledge so that you can do a better job of hiring than in the past, or
- budget that you are ok losing (because you’ve carved it out from your war chest) to test on new channels.
Of course, the best way to go about marketing and hiring for marketing is to prove out a channel internally first, and the hire an agency to take it to the next level. Hiring an agency to work on a brand new channel you’ve never done before is a long learning curve in the best of times, and if you require it to work faster than that you can either put more budget towards it or shouldn’t do it at all (or yet).
Why “pay for performance” agreements are bad for service firms
Silicon Valley and the tech world broader love to talk about “the big exit”.
In fact, an article came out in the New York Times in 2019 talking about how the Lyft/Uber/Pinterest/AirBNB IPOs this year are going to mint thousands of new millionaires (at least on paper with their RSUs) in San Francisco. I know a fair few people in those thousands.
But the reality is, these people hit the lottery. They got lucky joining something early on.
A lot of young tech employees see an offer from a young startup and their “thousands of options”, and like to calculate out that if the company sells for $XXX,XXX,XXX then they’ll make $Y,YYY,YYY.
I did this. My wife did it. A lot of our friends have done it. I’ve been an unpaid advisor (paid in options) for tech startups in the past where I drove a ton of organic growth for them, mentored their acquisition leader, and then my options became worthless when they raised a big new round of funding and wanted to clear up their cap table and I didn’t have $20,000 to buy my options.
This is possibly an extreme case, but what many people in the tech world fail to take into account are things like:
- Dilution: your shares can be diluted in future funding rounds;
- Execs can make funding or business model decisions without consulting you, thus affecting your financial outcome;
- VCs can command certain times (liquidation/payback preferences) that mean they get paid first and you might not get paid even if the company sells for the $XXX,XXX,XXX you originally calculated (and the chances of that are miniscule).
Reality is, if you want to make it rich in the tech world in the current day you should join Apple/Facebook/Google/Microsoft and get a great salary and some stock options that vest over time, then ride it out there and continue to get more stock and retention packages and raises as you rise through the ranks.
If you want to get wealthy as a marketer, start your own company or go work for a great company that pays you a great salary. Spend a lot less than you make.
I’ve spoken with a lot of marketers over the years who have engaged on pay-for-performance agreements in the past, and almost every reaction looks like this:
I have never, ever had performance-based billing go well. Not when we succeeded. Not when we failed. Ever. Evarrrr
— Ian Lurie (@portentint) December 17, 2018
For some marketers, it seems the times have changed and they no longer do it:
We use to do “don’t pay until x rankings” in the old days before Google Analytics. These days we couldn’t as the risk and resources committed would bee too much. Now just month to month with no [g]uarantees.
— James Svoboda (@Realicity) December 18, 2018
Once again on the surface, it may feel like “getting an upside” is a really good business deal especially when you’ve been consulting for a long time and maybe feel tired of your clients seeing huge gains while your budgets never seem to increase.
I hear you. It can get frustrating. I’ve felt it.
But I don’t think working on a pay for performance basis is the right move the vast majority of the time. There may be times that it does make sense, but in order for a setup like this to make sense you need:
- A full understanding of the market and what it is going to take to truly compete;
- A history of working with the person already to know if they are trustworthy and capable of running a company;
- Full insight into the company and where else they are spending money that could be hurting your results;
- Complete access to Analytics and the ability to set up proper end-to-end tracking so that both parties are accountable to the results;
- Budget to do whatever is necessary to grow the business, such as new designs, landing pages, testing new channels, and more.
If you agree to work for a percentage of earnings, you are taking on all of the financial risk (one could argue that they are taking a risk that you won’t deliver and thus they waste time, and I wouldn’t disagree here) for someone else’s company.
If you want to work on a performance basis, go start your own company. Find a cofounder you trust to help you take on a market you fully understand. At least this way you’ll have full discretion to do all the tracking, marketing, design, etc and know that you’ll be able to actually get paid.
Know your value
Finally, there’s a misconception that I hear often that goes something like this:
“Well, the best should want to work on a performance basis because they’re confident in their abilities.”
The best know their value.
Lawyers don’t take cases on a pay-me-when-we-win basis unless they’ve already made their money elsewhere and are trying new things out. And they’re not banking their retirement on it.
The best marketers know what they are worth and what their skills are worth to a company. They’ve done it a lot of times and have a system that works, and they know they can get paying clients who want them to do that for them instead of asking them to work for free.
They also have their own salary to pay and maybe that of employees too.
I would say that the best marketers are also building their own properties on the side from their consulting work and eventually going full time on that.
The best marketers I know charge $300+ an hour (and often a lot higher), though there are a lot of agencies out there working in the $100-$200/hr blended rate range. They usually work on a retainer basis or sell a balance of hours though, and when it comes to hiring you get what you pay for.
It may cost less per hour to hire a more junior person, but the work will take them longer than a more senior person and it likely will not be done nearly as well, and definitely not as efficiently. Check out this math:
- $100/hr for 20 hours = $2,000
- $200/hr for 10 hours = $2,000
- $400/hr for 5 hours = $2,000
You’re paying the same amount, but if someone can get the same or better results in 1/4 the time why wouldn’t you pay them 4x as much (or more)?
At the end of the day, it’s up to you of course. If you’re trying to hire and want to find someone on a performance basis, be prepared to search long and hard and likely be disappointed.
If you’re a marketer wanting to try something new, go for it. But don’t go into it naively thinking you’re going to get rich. Research the niche, the person, the industry, the site, and what will be required to succeed. And honestly, be prepared to not get paid even if you meet the initial results because the person holding the checkbook moved the goalposts on you.