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AM: FW: Pricing suggestions

To:     "''" <>
Subject:     AM: FW: Pricing suggestions
From:     Mitch Arnowitz <>
Date:     Wed, 11 Jun 1997 14:41:36 -0400

> On Monday, June 09, 1997 Ann  Shack <> wrote:
> > We have a negotiation coming up soon, and would
> >appreciate any and all perspectives about how to handle
> > it. Here is a sketch...please feel free to ask any question
> > or make any comments (no flaming!)
> > The situation:  our company develops surface transportation
> > software. We have a site on the
> > which draws a lot of usage. A prospective client wishes to
> > have us customize a version of our software and make it
> > available for their members. Revenue will be generated in two
> > ways: (1) through adds on the site; and (2) by sharing revenue
> > with a third party who develops destination database information.
> > Problem:  our advertising model is a fixed cost per property per
> > year. Initial costs are high, so we would like to get as much cash
> > up front as possible.
> > How would you:
> > - learn how much cash they can advance, both to cover expenses
> > and to advance royalties
> > - decide the revenue splits
> > -determine the length of the contract
> > -other??
> > Thanks for your help.


We have struggled with many of the same issues as we negotiated a
contract last year wiht a group of programmers -- its hard to figure out
just which way the arrow points sometimes. And (based on my research) I
found no "accepted business models" out there to use as guidelines.

In general, I would ask -- what does the financial data show? You need
to construct a financial model first, with assumptions, before you can
start defining your negotiating strategy.

Can you define your revenue sources a bit more precisely?

For example, advertising aside, will there be any other sources of
revenue? Do you envision providing an opportunity for online commerce,
for example, offering goods and services of interest to inveterate
travelers? And which of these revenue streams fall within the scope of
your revenue sharing arrangement? Which are yours alone? And will there
be any other revenue-sharing arrangements with any other third parties?
Who retains ownership of the user database? Are there any limits on its
use? etc etc ec

We went through a similar exercise with a group of programmers, with the
intent of arranging for programming, web site development and web
hosting services in exchange for a combination of up-front funding and a
revenue share on our licensing fees -- and on our licensing fees only.
We relied on a spreadsheet-driven process of estimating our potential
licensing fee revenue (three scenarios -- high, medium and low, each
scenario then further discounted with a range of risk factors) over a
three year period. 

We then estimated the value of services which the firm would be devoting
to our project, and then made a proposal to them for a % revenue match
which provided them with not only a reasonable return on their
investment, but also a decent portion of the upside in the event of the
high++ scenario. But our revenue match was for a licensing fee only, and
did not include any other potential revenue streams we might develop,
such as income derived from sale of goods and services.

We presented this data as though they were investors seeking a return on
investment, and having the numbers not only focussed our thoughts but
also ultimately served to center  the entire negotiation, as they simply
never brought any other numbers to the table. The debate then simply
became which scenario we could convince them was most likely.

Your case seems a bit more complex, in that (as I understand it) you
have three parties involved in the discussions -- you, your client, and
the third party.

In your case, in order to effectively negotiate with your client and the
third party who develops destination information, you have to make some
assumptions regarding the potential costs associated with their
involvement with your project (which may be minimal or incremental to
them), as well as the potential additional revenue they may derive from
the partnership (which may be significant), how certain that revenue is,
and whether "thinking outside the box" could open up other revenue
streams for you and them.  
In one sense, your expenses are irrelevant, unless this is a true joint
venture with sharing of costs and expenses. It is not likely that anyone
will agree to a deal providing a sub-par return simply out of concern
for your start-up costs -- unless, of course, you are willing to agree
to a skewed revenue share percentage in exchange for the upfront
funding. Then it becomes a question of their risk tolerance.

However, if you truly bring to the table a technical capability which
could not easily be replicated, you may well have sufficient leverage to
seek an up-front payment in exchange for the work you have already
performed in development, as well as the customization effort. But you
will have no sense of either parties "choke point" unless you run the
numbers first.

The time frame for the contract just depends on what your busines model
assumptions are, and whether you think you will have more leverage in a
year than they will! 

I don't know whether this has been helpful or not, but I would be happy
to walk you through our model if it would help.

David C. Frankil
the virtual compliance company

202 463-9740 (direct - day)
703 534-6753 (evening)
703 533-5551 (fax)

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