Earn Your Keep

As the economy worsens and consumers cut costs, competition for customer dollars has grown tighter. Now some companies have to get customers the old-fashioned way—earn them.

In other words, just promising ROI is no longer good enough to win over potential clients. Customers want the companies working for them to have some "skin in the game." What better incentive to do a job right than a contingency fee based on results? Of course, this incentive-based payment is an old-school business practice employed regularly by attorneys and consultants—but it's making its way into all kinds of companies fighting for new business.

One example is Direct Insite. The fastest growing part of its business is a service built around its data-mining software package called dbExpress, which tailors systems to help clients lower their telecommunications bills. DI's clients have saved as much as 20 percent per month after renegotiating telecom contracts and monitoring usage through the system. And best of all, they don't pay until after they see the value of the service. "Given a choice between being charged a service fee or sharing a percentage of the savings, customers overwhelmingly choose the latter," says Christopher Carberry, Direct Insite's director of business development.

A problem with contingency fees is that incentive billing can sometimes backfire—especially if it's only a part of the pricing plan. B2B online auctioneer FreeMarkets charges most customers a monthly fee based on the amount they agree to sell through its online marketplace, but occasionally it charges customers an additional fee if the company can show savings over a negotiated amount.

According to Emily Andren, a senior analyst for e-business management strategies at Gartner, this strategy could hurt FreeMarkets, which has seen a number of customers bid farewell. "I just know that one of the reasons customers are going away is that they don't like paying part of their savings to FreeMarkets," says Andren.

"It takes a lot of maturity and fiscal discipline on the part of the client to be able to make something like this work," says David Garfinkel, president of Overnight Marketing, which handles many of its clients on a performance-based payment model. "But if they can follow through on it, they'll end up better in the long run. Because all they're really paying for is a portion of money they didn't have to begin with."

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Ziff Davis Smart Business.