Lead Generation Contracts Explained
A lead generation contract is a document wherein one or more parties agree for a consideration that one of the parties will deliver leads about prospective customers to the other party so that the other party may make a sale to them. These considerations are usually money paid for the delivery of the leads once they are received or a share of profits from sales made to leads delivered.
Where the considerations involve the sharing of profits from sales made to leads delivered , the lead generation arrangement becomes akin to a sales referral agreement. There is even a tax case where a lead generation contract was found to be a commission agreement for tax purposes.
Lead generation contracts are extremely useful for businesses that have limited human resources, given the expensive and time-consuming nature of identifying prospective customers and reaching out to them. The extent to which a business can rely on lead generation contracts and other forms of outsourcing would typically inform that business’s decision on whether to hire additional people or invest on technological infrastructure.
Key Elements of a Lead Generation Contract
When entering into a lead generation contract, both parties should clearly understand the scope of services to be undertaken. For example, a lawyer may wish to hire someone to place ads in various online forums, or to post answers to questions on websites that contain links back to the lawyer’s website. Paying for clicks back to a website is also an increasingly popular method of lead generation. The lead generation company may also want to hire third parties to provide the services. In any event, the scope of services must be defined in detail so that both parties have unambiguous obligations.
The compensation to be paid should also be stated clearly; whether the payment is on a per click basis (to induce the generation of further traffic), or on a per call or other basis (in exchange for qualified leads). Are there minimums? Are the fees due monthly, upon receipt of each qualified lead, upon signing of the agreement, etc? Is there a bonus for bringing in "particularly desirable" matters? What happens upon termination of the contract?
The term of any contract should be specified – is it for six months, one year or longer? The contract should also provide for termination rights for both parties. Are termination rights absolute, or subject to a cure period? Are there automatic extensions or renewals based on performance?
Advantages of an Effective Lead Generation Contract
The first and foremost benefit of a well-structured and drafted lead generation contract is a clear line of demarcation for what is expected from both parties. The last thing that a lead generation business wants is for its new clients to be confused over what services it is going to perform for them. In fact, in the context of lead generation agreements, there are three things that your client should always have clear on: 1) revenue generated; 2) what actually constitutes a "lead"; and 3) what constitutes "success" for the parties.
Second, a well-structured lead generation contract will actually help you to generate more leads. Confused customers are more likely to cease using your services because they are frustrated with the lack of results. Meanwhile, a customer that understands exactly what services you provide will be able to appreciate the full effect of your efforts and will be more likely to appreciate the value of your services.
Third, the contracts that do not specifically enumerate the duties and obligations of the parties can lead to conflicts down the line. Sure, a one page contract could be the result of "trust," but most businesses would probably prefer to "trust, but verify." Without enough detail, the lead generation business could come under scrutiny from the lead generation client over whether or not it is performing its duties. Contracts that are not detailed usually end up costing the company more than if it simply had a well drafted lead generation contract in the first place.
Fourth, an attorney that has experience in drafting lead generation contracts will understand the fine points that make an agreement effective. A well-drafted lead generation contract speaks for itself and can be reviewed without skill, education or understanding of the relevant field.
Lead Generation Contract Mistakes to Avoid
As with any contract, there are a number of common pitfalls. In drafting a lead generation contract, here are some of the more typical mistakes – and how you can avoid them:
Not having a clear idea of how you want to pay for leads. Many lead buyers are not really clear on how much they are willing to pay for a lead, or the value of the lead itself to their business. This can lead to disputes, with the lead buyer trying to reduce the price of the leads once they have been generated (which is a clear breach of the contract).
Not being clear on the contractual obligations of both parties – and where the liability lies. Most often, if the lead seller is generating leads by submitting the lead to their website, that is not a problem. It gets problematic when the lead is put into an automated system for distribution, or is sold in real time through an API. In those cases, the lead seller often does not have the opportunity to consider whether the lead is suitable for the lead buyer. This may give rise to a claim for negligence against the lead seller. Conversely, there may be hidden liability for the lead buyer if the contact information fails and they have to pay again for the lead.
Assuming the lead buyer will monitor the quality of the lead. Especially when the lead seller receives payment per lead, there is no incentive for the lead seller to actually ensure that the lead is of any quality. The lead buyer often ends up being the entity responsible for monitoring their leads, which can become a time-consuming process that eats up their profit margin.
Being over reliant on automation – without having an exit strategy. Automation can have its advantages, but at the end of the day, the level of human management in the leads business must be at a level that protects your relationship with the leads buyer.
Not having a process to deal with disputes. Such as was so often the case with email marketing agreements in the early days, lead generation contracts are often entered into on a "best you can get" basis. This is fine until a dispute arises over the value of a lead – then the relationship breaks down and the work done becomes wasted.
Inadequate or incomplete terms. At the very least, every lead generation contract should set out: The lead generation process, in detail. The exact obligations of the lead seller and the lead buyer (in cases where a lead buyer uses an automated system to get their leads). The terms of payment of commissions – how they are calculated and when they will be paid. Any processes in place to check the quality of leads. Penalties for non-compliance.
Lead Generation Contract Template
Below is a sample lead generation contract template that covers basic areas of risk and should serve as a starting point in the creation of a lead generation agreement:
AGREEMENT
THIS AGREEMENT ("Agreement") made as of the ___ day of _____, 20__, by and between ________________, a _____________ ("Company"), and _______________, a ______________ (or individual) ("Lead Generator").
NOW, THEREFORE in consideration of the mutual covenants and conditions herein contained, the parties hereto agree as follows:
1. Lead Generation Services. Company desires to engage the services of Lead Generator to provide leads (each a "Lead") for Company’s products and/or services and Lead Generator is willing to provide such services to Company on the terms and conditions set forth in this Agreement.
2. Payment. Company shall pay Lead Generator, based on Leads submitted and accepted by Company, all at the rate of $[xxx] for each accepted Lead submitted by Lead Generator. Lead Generator acknowledges that it is solely responsible for its own costs and expenses, including, without limitation, travel expenses, incurred in connection with this Agreement unless otherwise stated herein. (Alternate provision where Leads can be returned and refunded – necessary if leads are being marketed exclusively on Company websites):
(If Company will only pay for Leads if leads are returned and a refund of Lead fee is requested) If at the exclusive option of Company, a Lead submitted by Lead Generator is deemed not to be an acceptable Lead hereunder because such Lead is returned and a refund requested ("Returned Lead") or because such Lead does not meet Company’s then current criteria for a lead, Lead Generator shall receive a [refund of (or, reimbursement for or, deduction from its compensation)] the Lead fee paid to Lead Generator for such Returned Lead .
- Ownership of Intellectual Property. Company shall own all right, title, interest and sole and exclusive ownership of all materials created by Lead Generator under this Agreement, including but not limited to all rights in and to any copyrights, patents and trademarks, now or hereafter created and/or embodied…
- Term. The Agreement shall commence as of the date set forth above and shall continue for a term of ___ [6, 12, 18, or 24] months and thereafter will automatically renew for successive ___’ month terms on the same terms until terminated by either party upon [30, 60, 90, or 120]-day prior written notice. Upon termination, (1) Lead Generator will cease activities as soon as reasonably practicable and in any event within ___ days following termination and (2) Lead Generator will no longer be entitled to payment from Company for any of its activities under this Agreement subsequent to the effective date of termination and (3) neither party shall have any continuing obligations to the other with respect to this Agreement except as set forth in Section 11. Termination.
- Non-Exclusivity. This Agreement and all activities of Lead Generator hereunder shall be non-exclusive and Company shall have the right to deal with other third parties in regard to the matters described in this Agreement, including those directly competitive with Lead Generator; provided that Company shall have no obligation to engage any third parties to which Lead Generator is not entitled to receive compensation under this Agreement.
How to Negotiate a Lead Generation Contract
When negotiating a lead generation contract, one of the most important considerations for both parties is the time commitment each is making in exchange for the income generated by the work performed. This consideration is the key to determining the value of the terms set forth in the lead generation contract.
For example, if you are a social media lead generator, your proposal to a small real estate firm may set forth the terms in which you will engage in a minimum of _________ hours per week of advertising their listings on Pinterest and Facebook. In this case, the age old formula of "your time equals the amount you are paid divided by number of hours you shall work" will determine the minimum you will be paid. But, in addition to the calculation of your time, this formula should also consider the other obligations you have in running your own business.
The negotiations in this situation are fairly straight forward. The two parties may bicker over how much time will be required, but for the lead generation business, you should consider the role you are performing. For example, if all you will be doing is putting a listing on your Facebook page with an ad (or there are no other considerations such as branding, etc.), then the royalty you receive in your lead generation contract should be based upon the amount of time required to do this, plus a reasonable profit margin for the effort (remember, this is a business). In contrast, if the real estate company will also require your assistance with some other matters, such as utilizing your business’ services, staff, and/or advertising for their benefit, you should consider negotiating a contract that provides for more compensation.
Another consideration in negotiating the terms of a lead generation contract is the marketing method itself. If the lead generator will be using a mailer to generate leads, it is likely that there will be additional costs for the mailing. These costs should be anticipated by the parties and should be factored into the royalty calculation after the numbers are crunched.
Alternatively, if the lead generator will use its own billboards to generate leads, the lead generation contract should address how the lead generator will be compensated if the sales happen quickly and the advertising services are terminated. For example, if all the leads you are generating are going to one of 10 properties on your billboard, what happens if one or more of the listings sells one day after the start date of the slide shows? Should the lead generator be permitted to re-target those same ads to another location for the same period of time? Alternatively, is this a business decision in which the parties have agreed to share in the profits (the risk)? The decision here will be based upon how quickly the property seller and the lead generator expect to have properties turn, if at all. The parties must come to some agreement about how long a commitment to advertising these properties should last.
Sales based lead generation contracts may be based on profits on sales from a given source or may be based on exclusivity given to a particular company and/or to the industry itself. No matter how the compensation is negotiated, some type of tracking may be required by the advertising engine you are using in order to get paid.
Legal Aspects of a Lead Generation Contract
When entering into a lead generation contract, there are several legal issues that both parties should consider. It is essential to address these matters in the Contract to avoid time-consuming disputes later on.
First, the Contract must specify the jurisdiction applicable to the Contract if one of the parties has outstanding lawsuits in multiple states. This can occur if a party owns more than one website generating leads or operating as a lead aggregator.
Second, the Contract should state whether it is governed by the United States federal law or the laws of a certain state. Generally, state laws are more favorable to the Lead Generator when compared to the strict federal regulatory rules.
Third, penalties for non-compliance must be explicitly stated. For example, the Contract should state whether a penalty of $3,500 per non-compliant call applies under the federal telemarketing rules or what the amount of each FTC civil monetary penalty will be (see 16 CFR ยง1.98). Under this Federal Trade Commission regulation, "[t]he Commission’s maximum civil penalties for violations of the Telemarketing Sales Rule and the National Do Not Call Registry are adjusted periodically according to the consumer price index."
In addition to the regulatory penalties, the parties can also state whether a breach of Contract claim can be asserted against the Lead Generator in case it missed any call, text or email cycles of consumers in violation of the "Safe Harbor" provisions.
Renewing and Updating Your Lead Generation Contract
Both lead generation service contracts and the form agreements used by the sellers of leads ("Lead Seller Agreements") need to be updated periodically, to reflect changing business realities for a lead generation business. Each Lead Seller Agreement typically contains a section entitled "Period of Performance," specifying when the agreement will commence and when it will terminate. The Period of Performance section may also specify that the agreement will be automatically renewed at the end of the term for an additional period of time, unless either party notifies the other in writing that it does not wish to renew. Even if the lead generation contract is valid for a certain initial period of time, the lead generation business will frequently want to continue a successful agreement far after the expiration date , and on the same terms.
With respect to both compliance-focused and efficiency-focused lead generation service contracts, there is often a review process put into place, to make sure that all of the contract terms are being met. During this review process, if there are issues with how a Lead Seller Agreement is set up, an amendment to the arrangement is sometimes put together to address such issues. Additionally, because of unanticipated shifts in the industry or one of the parties, at the time the Lead Seller Agreement is drafted, there may have been an ongoing requirement for performance metrics that has changed over the years. For the sake of efficiency, a Lead Seller Agreement should be updated to clarify those metrics, if there is a question as to how to measure past performance or to avoid possible disagreements in the future.