Big Brands Embrace Performance-Based Pricing Agency Relationships

Posted on by Chief Marketer Staff

With a contagious desire for accountability spreading among marketers, some big brands are insisting their agencies change pricing models to better align agency and marketer goals and better motivate agencies to deliver real value.

A recent Economist article, “Clock-watchers no more,” cited April 20 statements from Coca-Cola about its decision to adopt a value-based compensation model in which it pays ad agencies for results achieved instead of hours worked. Along with Procter & Gamble, which has embraced performance-related fees for 12 of its brands according to the article, Coca-Cola is blazing trails to put this model in place, which it hopes will become the new industry standard.

A recent post on the 4A’s Business Development Blog from Sarah Armstrong, Coca-Cola’s director of worldwide media and communication operations, offers further detail on the new agency compensation plan. Essentially, Coke establishes a base fee for a project and incorporates a pay for performance overlay that allows the agency to earn 23% margins or 30% mark up on the base fee. The base fee, not tied directly to agency labor or cost, is established through a combination of adjusted past fees and Coke’s current value considerations, which include budget, strategic importance, talent assigned, industry dynamics, etc., according to the post. Coke then evaluates performance with agency evaluation scores (40% – 50%), specialist metrics (40% – 50%), marcom metrics (10%) and business performance metrics (10%).

While CMOs at brands large and small can benefit by infusing more accountability into their agency relationships, understanding the evolution, limitations and advantages of performance-based approaches can clarify some important considerations and the tangible opportunity at hand.

The accountability of the online channel has helped drive the movement and evolution toward performance-based approaches. Examples of the performance-based compensation models spawned online include revenue share, where agencies receive compensation based on a percent of sales generated, and cost per action (CPA), where agencies receive a payout for each action or lead generated.

Marketers like Coca-Cola want the same accountability offline, so that agencies earn more for great work and less for lousy work. Some offline limitations still exist, but many leading agencies have already made great strides in demonstrating ROI of offline efforts. While marketers cannot easily track an individual in-store sale spurred by a television commercial as they could with an online ad, for example, an advertiser might ask agencies to reign in costs while boosting overall sales with a national branding campaign. So while an online campaign can measure the effectiveness of each click, offline efforts most often focus on the aggregate effect.

Regardless of whether ROI is measured at the transaction or aggregate level, performance-based approaches offer several important benefits. Perhaps most significantly, a performance-based approach incentivizes agencies to do what they should have been doing all along, leverage the most efficient and effective marketing channels available for the right blend of reach and targeting. As this more balanced approach continues to gain steam, more agencies will diversify offerings to remain competitive and equip themselves to effectively buy and manage digital and offline media in unison.

Naturally, with an overall performance-based approach, agencies can systematically leverage online and offline channels to get the most out of integrated programs. The net effect of this change will most likely drive the entirely offline ad campaigns that remain today into extinction. Agencies that make the change stand to reap long term benefits, because although performance-based compensation models take more time to develop for broadcast and print advertising, Coke, P&G and others have already shown them to be worth the effort.

Specifics aside, CMOs desiring more accountable marketing should consider:

  1. Emphasizing the overall goal of maximizing results and reducing costs
  2. Looking for opportunities to infuse more accountability into agency relationships
  3. Seeking out agency partners with diverse, cross channel expertise
  4. Incorporating performance-based pricing models into future RFPs and agency roundups
  5. Awarding less work to agencies that resist the change and more to those that deliver

Marketers that can effectively transition their partner agencies have much to gain. Going through this process will naturally help weed out some less than cooperative agencies, but those that emerge as worthy performance-based partners could deliver and demonstrate value for many years to come.

Michael Kahn (Michael.kahn@performics.com) is senior vice president, marketing, at Performics and a monthly contributor to Chief Marketer.

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