Results-Based Management vs. Effort-Based Management
Mainly, there are two revenue models in the e-commerce industry: The Transaction Fee Model and The Maintenance Fee Model. So which is better? At E-Complish, we look at the transaction fee model as “results-based fee” whereas the maintenance fee model is a “passive-based fee.” Before we get into which fee approach is better and why we should first get a little understanding of Results vs. Effort based management.
Let’s cut to the chase. E-Complish strongly believes in results-based management. Meaning, in all we do, we put our efforts towards results. That seems like a straightforward statement, but is it? Results based management is a philosophy that says, “in everything you do, it should be producing results. If what you are doing is not producing results, then you need to stop and readjust your work, the project, or your thinking.” That means, we never have meetings about meetings, nor do have meetings that are not entirely necessary. As a company, what we do throughout the day at E-Complish should always be making money (aka results). If it is not, then stop. That is the gist of results-based management. So what is the opposite of results-based management? Effort-based management. Effort-based management is what we are all used to from corporate America. We are to meet about everything, have phone calls about everything, analyze everything and repeat. A lot of effort with little to no results. The projects get harder and longer.
Now, put these two types of work styles in the form of fees. A Results-based firm like E-Complish thrives on a transaction fee model because it is a “results-based fee”. Meaning E-Complish does not get paid unless a payment is made by a consumer using one of E-Complish’s payment systems. We have been quite successful using this revenue model, and we highly recommend to all of our clients that they try to do business only with service providers who use this same revenue model. We are committed to the concept that transaction fee models are what provide a real win-win situation for our clients and us.
But this begs the question: “why?” Why should you do business with someone who gets paid by transaction fees instead of someone who merely charges you a maintenance fee price up front every month (or whatever period)? Why are we so sure that ours is the better model of doing business?
If you’re an E-Complish client, you know that this question boils down to quality and performance. Quite simply, what the transaction fee approach means for you is that if you don’t get paid, then we don’t get paid. We only get paid once we have delivered some value to you. No benefit to you means no money for us.
Once we have set up your customized electronic payments solutions (which we do for a very low or, quite often, zero setup fee), we only get paid our transaction fee when our system facilitates your getting paid by your customers or clients. You don’t owe us any money at the beginning of the next billing cycle just because you’re using our applications and services. They have to work for you, and if they’re not working, then we have to repair them, pronto—because, again, if you aren’t getting paid, then neither are we.
E-commerce or SaaS businesses that are set up on the subscription model aren’t beholden to their clients the way that companies, such as ours, who are set up on the transaction fee model are. If you sign on with one of them, they get their money from you at the beginning of each billing cycle, whether their services and applications are working for you or not. They feel no sense of urgency to make necessary repairs or updates. If they get around to that, they’ll just do it in their own sweet time. Remember, they have hundreds of pre-meetings, meetings, and re-meetings to attend to for their effort-based management!
“Wait a minute,” you may counter, “companies that use the maintenance fee model surely don’t want to go around failing to address their clients’ complaints and problems! Their clients will leave them!”
That may be true, but the reality is that maintenance fee modeled companies are prepared and willing to endure far higher turnover rates than transaction fee fashioned companies are. If one of such a company’s clients gets angry and cancels their subscription after, say, one year, that’s still one full year of revenues that the company took in—and, they didn’t need to do much work after the initial setup. Meanwhile, their sales department gets them a few more subscribers, and the same pattern repeats or may repeat.
This is all certainly not intended to mean that all subscription modeled businesses are owned and operated by people who are uncaring or unethical! However, the heart of the matter here is incentives. The human reality is that incentives to avoid negative or harmful consequences quite often motivate people more than “being nice” or “wanting to do the right thing” do.
A business that’s set up only to get paid by way of a transaction fee is incentivized to do all that it can to set everything up correctly the first time and then, if there are problems that arise, to cut right to the chase and solve those problems for its clients. What’s more, such a company is also incentivized to continually work to make its services and applications better over time. For each client must be continually pleased.
Consider the analogy of buying magazines. There are two ways to buy one: either you go to the newsstand and buy one at a time (usually each month), or you subscribe to, say, one year’s worth of the magazine in advance.
The sales department at the magazine publisher’s office sells subscriptions based on two factors: a discount off of the newsstand price, and convenience (the magazine comes to your mailbox each month). If the cover price of the magazine is $8, perhaps the subscription rate equates to just $5. Instead of paying $96, they say, you can pay only $60 for a whole year’s worth of the magazine!
This has its obvious appeal. But the trick is if you’re like most people you will only read a few issues of most magazines each year. Out of 12, maybe only three grabs you and compel you to read them. If you bought just those three at the newsstand price, you would spend $24—not $60. And, you’d be quite satisfied.
This isn’t a perfect analogy, but you get the gist. Buying the magazine (or not buying it) one issue at a time is like paying only a transaction fee when the value has first been delivered to you. Subscribing in advance, while sold as a money and time-saving system means that you don’t know what you’re going to get or if you’re even going to like it, but the magazine publisher already got paid anyway.
At E-Complish, we’ve been highly successful by focusing on cultivating client loyalty through our transaction fee model rather than advertising to capture lots of subscribers who are likely to be gone in a year or three. And so, we recommend that, whenever possible, you do business with a company structured around the transaction fee revenue model. You will be doing yourself a big favor in the long run, and you should not have to worry about quality and performance. Happy hunting!