Posted by I often get asked questions about the split you should offer when putting together your joint venture deal. So – without beating about the bush – here’s a fairly definitive answer.
A standard JV deal usually consists of a 50-50 split of the profits between you and your partner.
This works well in the vast majority of situations. But …. beware! In some cases it may not satisfy all of your partners. Most partners you approach will be more than happy to be offered a 50-50 split. But some will expect more. And in others it may not be the best solution for you. So you really do need to judge each situation on its merits before jumping in and offering 50%.
So, why do people ask for more than 50%? Are they just being greedy? Or could it ultimately work out in your favour?
Think of it this way: Any marketer worth doing business with will know how valuable their endorsement is. They know that their list is responsive. They also know that once you get their customers to buy from you their customers becomeyour customers. And if you’re doing your job properly you can (and should!) sell other products to them …. perhaps adding up to hundreds or thousands of pounds.
So, faced with a situation where a JV partner is asking for more than 50%, should you give it?
The answer? Perhaps! But first you need to consider one of the most important principles of good marketing: It’s all about ‘buying’ a customer for life more than anything else. If you’re thinking in terms of long term massive profits rather than short term small profits then you must plan to offer more and more products to your customers and other contacts.
A very good way to think of this is that every business has to work hard and spend a certain amount of money to ‘buy’ a new customer in the first place. Once you figure out how much a new customer is worth to you then you can get a good idea of how much you can spend on ‘buying’ that customer. Then the whole question of how big or small your JV split should be suddenly starts to make a whole lot more sense.
For example, say you do a bit of research and you figure out that a typical new customer will spend £1,000-£2,000 with you over a period of months. (And this is not at all unusual believe me!). Then you can see that you can afford to offer your partner a higher than 50-50 split in the first place …. just to get that person into your marketing system. And it will be well worth it too.
Conventional businesses call this a loss leader. Supermarkets, for example, often sell bread at cost price or less. They give their suppliers a bigger cut of the dough – if you’ll pardon the pun – to help bring customers in through the door. Knowing full well that if they do this their customers will spend £1,000-£5,000 or whatever with them on other stuff throughout the year. It works more or less the same in JV’s.
At the end of the day the choice on split is yours. As a general rule I recommend you not to give away all your profits on a JV deal too easily. Many partners will be delighted to get 50% of the profits. So that should be the starting point. It’s just that the whole thing starts to get a lot more exciting – and profitable – once you know how to get the split right.