Contingency Pricing: The Pros and Cons

Contingency pricing: Fees based on Results

Contingency pricing refers to a price that is based on getting a share of the results, specifically the results you may earn for the customer, whether you help them earn cash or cut costs.  It’s usually set as a percentage of the value, especially when that value can be easily quantified.  At Tenato, we have run across certain clients doing this a handful of times over the years.

For example, personal injury lawyers often will work on contingency because the winnings in personal injury cases can be very large, while their clients’ ability to pay cash upfront, especially if they’ve been severely injured and are now unable to work, is very limited. In this situation, the lawyer looks at the case, decides whether winning is enough of a sure thing to be worth taking the chance, and sets a percentage of the claim that the firm will receive when the case is collected upon, e.g. 33% of the settlement.

But contingency pricing isn’t just for lawyers. A few potential clients over the years have asked for our firm to provide contingency pricing on marketing services. They call it, “having skin in the game.” And they believe that if we have both upside and downside risk to the resulting sales revenue from all of our marketing efforts, this will make us work harder for success. Let’s take a closer look at this.

Benefits of Contingency Pricing

There are a few key benefits that only contingency pricing can offer:

• It reduces the upfront cost (sometimes to zero) for the buyer. For example, what if you can’t afford a high-priced lawyer, marketer or other service provider? Maybe there’s one who is willing to work based on a portion of the results achieved.
• It makes the vendor work hard to get paid. If the vendor only gets paid if results happen, then the risk is all on the vendor; this makes the vendor push hard to overcome obstacles. Note that if the client becomes the obstacle, the vendor may have to push the client very hard indeed, if he or she is standing in the way of the results being achieved.
• It facilitates a more realistic valuation of the services. Why should a vendor only get paid a small amount if they are bringing massive cash winnings to the client? With a contingency price, they might earn many times more than under any other pricing method.

This last point is an important one. Imagine that all goods and services were charged in the above manner; it certainly makes you think. There are certainly some professions that are being highly undervalued, for example – 

• Imagine teachers being paid a percentage of the future earnings of their students; these would be some of the wealthiest people in society.
• Imagine doctors, nurses or even health clubs being paid a percentage of the lives they extended (and if those lives were given a quantifiable value, say by earnings or contribution to society). You’d be paying a doctor for the rest of your life.
• Imagine executive assistants being valued at say 10 – 20% of the value of the executive they assist. It would probably create a tenfold pay increase.

My point here is that it could be important to have an understanding of the value that you’re bringing to the table, even if you’re not using contingency pricing. Now let’s examine the drawbacks of this pricing method.

Drawbacks of Contingency Pricing

On the surface, contingency pricing might seem like an exciting idea.  But here’s a comparison using two kinds of services, and how they differ regarding contingency pricing. 

When to Use Contingency-Based Pricing

Overall, then, we see that contingency pricing requires certain factors to be present in order to be a successful pricing arrangement:

• When it’s quantifiable. The amount of the “win” – whether it is money coming in to the client, or a cost savings, must be directly attributed to the vendor’s activities. The client must be willing to share this data, in full, with the vendor.  
• When there is clear timing. Having a clear date when services are complete with the result achieved gives certainty around contingency payments. Without this, payment can be pushed out indefinitely while the vendor continues to work and work to make the results happen. Even in legal cases this can be difficult (as portrayed in the movie Erin Brockovich , where the case kept ballooning to include more and more claimants), and the lack of a set end-point can be a major problem.
• When the vendor has a lot of control. The vendor must have a high degree of control in the relationship, and/or the customer must be willing to give up more control in the relationship. While a lawyer can’t control what happens in court, he or she usually does enjoy a great deal of control in the client relationship to direct it in such a way to as to maximize the win. In the case of a marketing consultant, the client will almost never accept 100% of the marketers’ ideas (and getting 50% is doing very well). This means it would not be fair to punish the quality of the ideas, when they were only partially implemented. 

If you’re considering some kind of contingency pricing, run your decision through the three factors listed above before you commit. If it’s easily quantifiable, determinable at a concrete date in the near future, and the client will give you as the vendor almost full control, it might be do-able.

But if there’s a good chance it could drag out, get messy and have the client meddling in your process, then you’re best to avoid it. If you have a client with whom you’ve already been working for some time, and you know it can put you on the same page even better than you already are, then it is something you could consider. (That said, if your client already knows how good you are at what you do, they’ll often want to avoid paying a large contingency share…it’s usually much cheaper to pay an hourly rate or project fee!)

 After all, the vendor’s upside risk is the client’s downside risk.

If you’ve got questions about our pricing strategy, or just want to chat, we’d love to hear from you.