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Revenue Sharing

If you wrote an add-on for a commercial product, and the developing company would like to offer the add-on as an option to their customers, how would you go about offering up your product?

The primary application can either be lease on a month-by-month basis or purchased outright, so I guess that same model could be used for the add-on as well.  But since this is the first add-on, it's a bit difficult assessing the value or at the very least, what percentage I should demand of the lease fee.

Sunday, July 11, 2004

Ask for about twice what you think they'll give you. After they rant and scream and threaten to walk out on the deal they'll make a counter offer that will give you an excuse to scream and threaten to walk out. Eventually you'll get together on a price.

Tom H
Sunday, July 11, 2004

From your point of view, it presumably has to be profitable. Take into account all the costs of doing business with them. That should give you your lower bound.

From their point of view, they need to make a profit and it needs to be worth their while to promote the add-on. Doing that calculation from their perspective should give you your upper bound.

The sweet spot, hopefully between the lower and upper bound, can be calculated as:

Just below the price that would make it worthwhile for them to abandon your offering and develop their own solution. If you go over that price then that is exactly what they will do. If you go below that price then you are not getting the maximum you can from the deal. It's a difficult calculation but you have to do it. Good luck.

Sunday, July 11, 2004

I'm having trouble arriving at numbers  here.

I am an independent contractor who works out of his home, so there is little overhead in terms of my business operational costs.  The program itself may take ~300 hrs to develop and hammer out all of the bugs.  I could probably count on spending about 500 hrs of support time both with the end users and coordinating developments with their engineers.

In terms of their cost if they were to do it alone; they already advertise so they have would have to revise their marketing material a bit to account for the new product.  They'd have to hire another developer at probably 45-50K, if they wanted to get it out the door this year (one of the reasons they are looking at my solution).

So how do the above factors factor into negotiating a % on a lease based software licensing system?

Thank for any insight.

Sunday, July 11, 2004

You and they need to calculate how much the add-on is worth to the potential customer base and what the realistic prospects are for turning that potential into actual revenue. That is difficult to do but that calculated number will give you the amount of revenue available for sharing between you and them.

If that number is much higher than the 50K then you can probably negotiate an amount near to the 50K for yourself. You can argue that there is plenty of revenue in it for them and your solution is more cost effective than them doing it themselves. You might even get more as the cost of them doing it themselves might be perceived, by them, as significantly more than just the cost of a developer.

If the number is 50K or much lower then the cost of them doing it themselves isn't relevent. There is no point in either party arguing that they want more than the expected revenue because that money just isn't there. You'll argue that you need, say, 15K to make it worth your while. They in turn will argue that they need to take, say, 25K to make it worth their while. If the total expected revenue is, say, 30K then you'll need to negotiate to see if you can arrive at a compromise so that the sum of the two figures equals the 30K, but still remains a worthwhile business deal from both perspectives. It will basically come down to the quality of your negotiating skills to get the maximum revenue for yourself without losing the interest of the counterparty. Good luck.

Monday, July 12, 2004

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