It’s not uncommon for potential clients to request a revenue-share as part of their engagement. At first blush, it makes sense to align interests in the hopes of driving an increase in sales, meaning more money for both parties. Yet agencies that operate under this model consistently underperform for their clients. After analyzing why this happens so often, I’ve identified three reasons why revenue shares between marketing agencies and clients are not as mutually beneficial in practice as they seem in theory.
1 – Short-Term Focus
Any decent digital marketer has tricks up their sleeve to drive quick revenue instead of investing time and patience into developing longer-term marketing strategies. Some of those tricks include:
- Poor and/or aggressive messaging that promotes direct sales, which may tarnish the brand in the process
- Heavy discounts that boost sales but hurt margins and long-term viability
- Taking credit for success from branded keywords (i.e. users that were already searching for the brand)
- Diverting customers who were already close to conversion into their funnel with tactics like affiliate marketing or checkout pop-ups.
The list goes on, but the point is – when an agency’s paycheck depends entirely on how much revenue they generate, they are far more likely to cut corners and invest in short-term strategies. These myopic strategies can tarnish the reputation and damage the long-term viability of the brand.
2 – Risk Minimization
When an agency’s paycheck depends on the revenue they create, the agency will stick to methods that guarantee a consistent return. Without downside protection, it’s hard to justify experimenting with strategies that may be riskier or may take more time, but could drive more growth with patience.
3 – Revenue Is Not True Upside
Cash-flow is great, but true upside takes the form of equity. For an agency to share in the risk of marketing its client, it should, in fairness, share in the reward (i.e. the increased value of the business). Equity-for-trade is the only way to truly align interests.
Retainer arrangements are standard for a reason – they make retention (and, therefore, long-term performance) the motivating factor in an agency’s work. If you’re still looking for that extra level of motivation, consider trading a portion of your equity in exchange for marketing services.