Getting paid according to what a company saves


4

I am considering creating a solution, which would save large companies time. I am certain that they would save this time, so I am willing to sell my solution for a price that is proportional to what they save. I can measure how much they save very accurately. My question is, could this business model work? I would also like to know how many percent of their saved costs (as in money, not time) I could maximum achieve (0.1%, 1%, 10% or maybe 50%)?

Pricing Business Model

asked Jan 23 '11 at 08:11
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David
1,567 points

5 Answers


7

Yes it can work, but here are a couple of issues to consider when using this approach:

  • You are not taking your costs/expenses into account. Will your solution involve recurring costs? Since you are targeting large companies, it seems unlikely, but it's possible that you may end up in a situation where your expenses are greater than your income from a particular company.
  • It could lead to your customers cheating you. You say you can measure how much they save very accurately, but you also speak of saving costs in terms of time. Are you really tracking time, and then converting that time saved to dollars? If so, you could open yourself up to getting less than you deserve. One example that comes to mind is if you are converting time saved to labor rates. Is there anything in place to prevent them from telling you that a particular labor category is valued at $100/hr, when in reality it's $150/hr? If you can actually measure savings in terms of real dollars instead of time then this is probably not a concern.
answered Jan 23 '11 at 11:46
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Zuly Gonzalez
9,194 points
  • +1 Great Tips, as always! – Frank 8 years ago
  • +1 Zuly is right to caution you on the possible hurdles with this Business Model. You need to be very upright with HOW you measure time saved, and what that time is worth. – John Sj√∂lander 8 years ago

3

Time is money, so

Yes, if there's a clear, simple and objective way to translate the time you're saving into a specific dollar cost reduction

Probably, if there is a dollar cost reduction, but you need one or two assumptions to translate from time to cost

Probably not, if there's no specific dollar cost reduction, or if the relationship between time and cost is complex.

Let's consider some real-world examples from the domain of energy management.

An energy broker examines a company's energy bills, and negotiates better agreements. They can ask for a percentage of savings. Back when this was a new opportunity, 50% of first year savings wasn't unusual to ask or achieve; competition has decreased the share.

An energy monitoring company instruments energy consumption with finer granularity than the utility bill and provides tools to highlight potential reductions. Some companies work on the basis of a percentage of savings, based on comparing bills across years. The dollar savings measurement is objective; there's an assumption that the work done translates into the savings experienced.

A carbon footprinting company offers tools to construct credible estimates of the carbon footprint of a company based on its existing infrastructure, operations and processes. It highlights opportunities to reduce the carbon footprint - many of which will also be cost-reducing. But there is no direct way of matching savings to the work (even though there is a relationship). So such companies typically price in other ways, selling the solution as a profect or/and licensed software or intellectual property. However, there will be opportunities to work in a share way in specific situations - for instance, if the regulatory context includes a priced carbon credit scheme.

answered Jan 23 '11 at 18:18
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Jeremy Parsons
5,187 points
  • +1 for the examples. I always find it easier to understand a concept when given an example. – Zuly Gonzalez 8 years ago

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This was a very successful model for phone bill consultants a few years ago, and maybe still happens. The pitch was 'show us your phone bill and we will reduce it. All we ask is for 50% of your savings in the first year'. It required a signed contract. It becomes difficult to collect when the amount is large. I did hear of one company refusing to pay the $450,000 the consultants were entitled too, but they were bound by the contract.

answered Jan 23 '11 at 11:56
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James
1,231 points

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Tax grieving services around here do it all the time - they will take on the task of tax grievances and then only take payment for the first year of tax savings that you get as a result.

answered Jan 23 '11 at 15:53
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Tim J
8,346 points

1

In a generic sense, isn't this how most ambulance chaser lawyers work?

JP Morgan has a program like this for getting discounts on vendor payments.

If your vendors agree to giving you a discount for getting paid quickly (say immediately vs. net 30), the vendor will give you a 3% discount. JP Morgan takes 1/2 of that 3% (or some other % based upon your contract with JP Morgan).

Another vendor at one of my clients provides a free service where they scan all of their contracts and legal documents, OCR and index them, providing a data extract that goes into one of the systems my client uses. This 3rd party then determines if there are any funds that have not been collected or any other weird scenarios that can happen in this industry where my client wasn't paid. They then take a percentage of that recovered funds. The third party vendor retains some ownership of the contract data they scanned because they use that to develop a database (in generic terms) that they then use as a basis for one of their products. As well, they can use the information they glean from customer a's contracts to go to customer b and say "Hey, Customer A owes you $xxx,xxx. If you let us come in and do 1, 2, and 3 for you, for free, we'll get you that money back plus more." It's a great cycle for them.

The hardest thing for you will be getting the reputation that you can actually do the work and get the kinds of return you think you can. Skepticism runs high at the CxO level and getting institutional buy in might be tougher than you think initially (even though you can see the benefit, these guys are constantly bombarded with people promising huge returns on investment).

answered Jan 24 '11 at 02:54
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Sean
1,149 points

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