Partnership-based Business: Profits
Author
Hello there,
I'm in the process of signing up a deal with a partner who has come up with a software application idea. I and another person was developing that software from the specifications given to us(which were quite vague, and we had to come up with our own Planning/Analysis/Design documents along the way). So, after the completion of the software we are planning on allocating a certain percentage to each one of us: the owner of software idea receives 60%, where in turn he receives 30% and gives 30% to those people/companies who are going to help us sell/distribute the software. We are getting 20% each.
The question is: do you think this is a fair distribution of profits, keeping in mind that even though he was the owner of the idea and will be responsible for marketing of the program, to give 30%(!) to his business partners just for distributing the software we made?
Another question here is: if we are to distribute the software via Web, what do you think are the fair percentage distributions associated with it? I was thinking along the lines that we receive 29% and he gets 42%, because on the Web there isn't much marketing involved.
A little background on this case. The idea' owner isn't a computer but more of a business-oriented person, who probably knows not much about online distribution, marketing and promotions. He thought that it was a good idea to create such software after some research on it.
The other person (programmer) who I am working with is an out-of-date programmer who knows Borland C++, he had to learn new language from scratch (C#) in order to build and assist me with building it. I, on other side, know C++ for 5 years and C# for about 1 year.
If you have any questions regarding clarification of this "question", please post them. I will be investigating it further at local Council who might help me in legal terms and concerns.
Thank you.
Don't underestimate sales. The product won't go anywhere without a good sales force. It also depends on how much of the tech support they are taking on.
Author
I am not underestimating it, however the project' support will be established after we distribute enough licenses to get funds and run it.
What concerns me is that is it really takes 30% to give away when dealing with distributors?
What concerns me is that is it really takes 30% to give away when dealing with distributors?
> do you think this is a fair distribution of profits
'fair' is a bit of a misnomer in business. It depends on what each partner brings into the equation and how much you can get without tanking the deal.
You need to determine what is going to be the retail price point and substract from that number the costs for producing one package (CD + documentation + packaging + transport). That difference is what you, the wholesaler (your partner), and the retailer (Wal-Mart or some other) will have to share. The rule of thumb is that the closer you are to the customer, the bigger your share of the pie; the power relationship in a value chain is rarely titled towards the beginning of the chain.
> if we are to distribute the software via Web
Then you remove the retailer and replace the wholesaler with a web site someone needs to maintain and operate. Same concept, except that now you will have to invest a lot more in PR and advertisement. Your costs go up significantly (fixed costs are ventilated across production runs) and thus your contribution margin shrinks. The question is: are you replacing the retailer's cut with advertisement & PR costs? Do that help move a lot more units?
Hope this helps.
-cb
'fair' is a bit of a misnomer in business. It depends on what each partner brings into the equation and how much you can get without tanking the deal.
You need to determine what is going to be the retail price point and substract from that number the costs for producing one package (CD + documentation + packaging + transport). That difference is what you, the wholesaler (your partner), and the retailer (Wal-Mart or some other) will have to share. The rule of thumb is that the closer you are to the customer, the bigger your share of the pie; the power relationship in a value chain is rarely titled towards the beginning of the chain.
> if we are to distribute the software via Web
Then you remove the retailer and replace the wholesaler with a web site someone needs to maintain and operate. Same concept, except that now you will have to invest a lot more in PR and advertisement. Your costs go up significantly (fixed costs are ventilated across production runs) and thus your contribution margin shrinks. The question is: are you replacing the retailer's cut with advertisement & PR costs? Do that help move a lot more units?
Hope this helps.
-cb
Author
Thanks cbenoi1, that was a quite good explanation, but I have a few more questions :)
> 'fair' is a bit of a misnomer in business. It depends on what each partner brings into the equation and how much you can get without tanking the deal.
Well, as I mentioned before, the "distributor" wants 60%, so, according to what you're saying by "the closer you are to the customer, the bigger the share of the pie", I deduce that it is a "fair piece" for him/her.
Through second question in respect to Web-based distribution I mentioned that the same above-mentioned person has absolutely no experience with PR and marketing via Web. But still, is it still "fair" giving 30% to the person who will be doing those things (PR and marketing on the Web)?
If I haven't mentioned it, I want to say that percentages are related to the profit gained off the sale of licenses and not off the gross-price (i.e Tax, Retailer and such). Although I'm not sure how it all works, I believe that even though there will be a retailer' cut somewhere, it will probably be taken from all of us OR from the 30% left that is to give-away for sale.
Thank you.
> 'fair' is a bit of a misnomer in business. It depends on what each partner brings into the equation and how much you can get without tanking the deal.
Well, as I mentioned before, the "distributor" wants 60%, so, according to what you're saying by "the closer you are to the customer, the bigger the share of the pie", I deduce that it is a "fair piece" for him/her.
Through second question in respect to Web-based distribution I mentioned that the same above-mentioned person has absolutely no experience with PR and marketing via Web. But still, is it still "fair" giving 30% to the person who will be doing those things (PR and marketing on the Web)?
If I haven't mentioned it, I want to say that percentages are related to the profit gained off the sale of licenses and not off the gross-price (i.e Tax, Retailer and such). Although I'm not sure how it all works, I believe that even though there will be a retailer' cut somewhere, it will probably be taken from all of us OR from the 30% left that is to give-away for sale.
Thank you.
Quote:because on the Web there isn't much marketing involved.
The Web is ALL about marketing, presentation and seo. To make it even worse, your dealign with people with less of an attention span then the average person who watches 2-4 hours of television a day.
Hear me now, distribution via the web done right can save you a lot of time and money - but do not think this cuts your advertising budget. You should also market it both online and offline. Setting up a team of cold callers to get trial versions or demos out of your software to business leaders will certainly help spread the buzz. Start a blog about your software.
Second, a business oriented person is not someone who gets "stuck in the times", if they don't know about internet marketing (using the internet to their advantage) they are potentially hurting their business.
Instead of direct percentages you should set up "profit sharing" after agreed amounts based on sale volume.
For instance, based on certain levels of sales their are intial payouts to pr, marketing, distributers, owner, and development. Once profits are being made from future sales of the software small percentages are given out to "outsiders" while "insiders" being sharing a larger chunk of it. (Outsourcing is great!)
Just a watered down, simplified explanation of what we do with other companies, and other companies certainly do with us.
> the "distributor" wants 60%
There are two ways to look at this; one is through margins and the other one through markups. 1) Profit sharing, where points in the value chain 'share' the rewards of the value to the end customer. This is what we are discussing here. That a distributor wants 60% is not uncommon. In many industries, you'd see 20-30-50 come up often (20% manufacturer, 30% wholesaler, 50% retailer). But in this method, you need to know the price point at the retailer's level. 2) A second method is to sell your product to the wolesaler as a stated price point and you don't care anymore how much profits each segment of the value chain adds up (or 'marks up') to the final price point the end consumer gets. The one control you get over the end consumer price point is through discount coupons you insert into the product's packaging or distribute to the retailer for free; wholesalers and retailers like this because it doesn't change their profits nor the way they need to do POS (Point-Of-Sale) operations. And moreover, people redeem rebate coupons at a rate below 20% on average.
> I deduce that it is a "fair piece" for him/her.
> {...}
> But still, is it still "fair" giving 30% to the person
> who will be doing those things (PR and marketing on the Web)?
Honestly, I can't tell you if it's fair or not in your case. Purchases - and in your case a profit sharing deal - are very emotional decisions, which are justified by arbitrarily chosen metrics.
-cb
[Edited by - cbenoi1 on May 14, 2007 9:50:21 AM]
There are two ways to look at this; one is through margins and the other one through markups. 1) Profit sharing, where points in the value chain 'share' the rewards of the value to the end customer. This is what we are discussing here. That a distributor wants 60% is not uncommon. In many industries, you'd see 20-30-50 come up often (20% manufacturer, 30% wholesaler, 50% retailer). But in this method, you need to know the price point at the retailer's level. 2) A second method is to sell your product to the wolesaler as a stated price point and you don't care anymore how much profits each segment of the value chain adds up (or 'marks up') to the final price point the end consumer gets. The one control you get over the end consumer price point is through discount coupons you insert into the product's packaging or distribute to the retailer for free; wholesalers and retailers like this because it doesn't change their profits nor the way they need to do POS (Point-Of-Sale) operations. And moreover, people redeem rebate coupons at a rate below 20% on average.
> I deduce that it is a "fair piece" for him/her.
> {...}
> But still, is it still "fair" giving 30% to the person
> who will be doing those things (PR and marketing on the Web)?
Honestly, I can't tell you if it's fair or not in your case. Purchases - and in your case a profit sharing deal - are very emotional decisions, which are justified by arbitrarily chosen metrics.
-cb
[Edited by - cbenoi1 on May 14, 2007 9:50:21 AM]
Assuming the software sells, you're lucky to be getting a deal at all. When I have software made it's work-for-hire, which means the programmer doesn't get any royalties or ongoing payment -- just payment up front for hours worked. Fairness isn't a consideration really, it's about market forces.
Author
I've got lucky and been offered a "piece of pie" instead of being paid hourly.
I wish to thank all of repliers for useful and up-to-the-point information, it has really helped me to oversee whats the business interactions are in IT environment (since I never been exposed to any :) )
With respect,
Daniel Protopopov
I wish to thank all of repliers for useful and up-to-the-point information, it has really helped me to oversee whats the business interactions are in IT environment (since I never been exposed to any :) )
With respect,
Daniel Protopopov
Quote:Original post by Daniel Protopopov
I've got lucky and been offered a "piece of pie" instead of being paid hourly.
That, of course, depends on whether the title/product sells in the first place :) The good thing about work-for-hire is that it's guaranteed cashflow. You're basically trading the potential of this being the next Excel or WoW against the certainty that you'll be able to pay your rent for the next 6 months :)
Allan
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