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pricing structures

i'm considering starting a new venture with a friend.  basically, he has access to data.  i would build essentially a reporting application around this data.  we could then resell this application to many different people for a flat fee.  we might be able to make a couple sales a year, and they would be in the neighborhood of a couple grand each. 

i have all the development skills, he has the information.  i'm trying to figure out a good way to share the profits between the two of us.  i will be doing 99% of the work up front, but he will be doing most of the selling and has all the contacts etc. 

if it costs me $3000 to develop this app, and we can sell it for $1000 each time, how should we divy that up?  i'm thinking i'd get a larger percentage up front to compensate for all the programmer hours i've put in, then that can back down as we sell more copies... any ideas?

just a developer
Friday, October 17, 2003

That sounds like a good plan.  If you structured it, e.g., as "I get 75% of the first $10,000, and then 25% for profits above $10,000," then you're effectively getting paid a bonus to complete the programming quickly, while he's getting a bonus for additional sales.  That provides a good incentive to each of you.

The most important thing is to find a division that seems fair to both of you -- if you start into this partnership with tension over the money, it won't last. 

Robert Jacobson
Friday, October 17, 2003

I wouldn't approach it with an "I do all the up front work" attitude.  You're dead in the water without a decent salesman, and he'll be what keeps you from starving while you're starting up.  I know from hard experience that software sales is non-trivial.  People who are otherwise very good salesmen have trouble selling software and software services.  If he can really sell it, he's worth quite a bit.  I'd approach it with a 50/50 split, because no matter how brilliant your code is it's useless to you as a revenue stream without him to sell it.

On the flip side, down the road he shouldn't get a bigger slice than you, because without your work on the product he'd have nothing to sell.  If such a proposal comes up, that's where you can trot out the amount of up-front work that you did.

Clay Dowling
Saturday, October 18, 2003

I have to say I agree with Clay.

There's no point arguing over it, just go 50:50 or don't bother.

You're both going to be investing in it (albeit in different ways).

You will probably think 50% is good in a couple years time when you're still getting paid and the initial work has well and truly been paid for.

On the other hand, don't forget maintenance issues. You may need to do some additional work in the future to modify and/or enhance the product.

Steve Jones (UK)
Monday, October 20, 2003

I'd go for fifty/fifty. It absolves any discussion of fairness, for an arbitarily 'fair' standard. Plus you'll get a better cut if it all goes very well.

Mr Jack
Monday, October 20, 2003

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