Pay Day

Procter & Gamble will pay ad agencies based on product sales. Here’s how promo shops will get their payoff.

Did you feel the earth shift on Sept. 15? That’s when Procter & Gamble announced that it’s going to pay ad agencies based on brand sales instead of media commissions.

The news that rocked the advertising world will send welcome tremors through the promotion industry, as P&G and other packaged goods companies force ad agencies to address retail issues and develop more behavior-based consumer marketing. P&G is sending its ad agencies to the promotion sandbox, and promo professionals better be ready to play.

First, the facts. The new system begins for about 200 brands on July 1, 2000. For the first year, P&G will set a percentage of current worldwide sales for each brand. Agencies get that percentage as their total compensation. As sales rise or fall, so does compensation. The percentage won’t shift, but if sales rise, agencies make more money. If sales fall, so does the paycheck.

P&G won’t comment on how it’s setting rates, but a spokesman says, “The process will be such that our agencies should not see their revenues in the first year differ dramatically from the year before.”

The compensation shift is part of P&G’s Organization 2005, an initiative begun in January to double P&G’s sales to $75 billion by ’05 (July promo). P&G spends about $3 billion on advertising and an estimated $1.6 billion on consumer promotion annually.

The company has no plans to change its compensation system for promotion agencies, which are now paid by commission based on costs. P&G may review compensation for other marketing services once it sees how the ad agency system works.

P&G’s stated goal is to get away from media-heavy strategies biased by media commissions. “It will simplify our efforts and keep us all focused on the end goal – increased brand sales,” says global marketing officer Bob Wehling in a statement announcing the plan. P&G’s ad agencies support the new system as a springboard to “media-neutral marketing” that emphasizes strategy over traditional media.

Sales-based pay also shores up P&G’s commitment to the marketing pros it has put in the field as market development organization reps (MDOs). That reorganization, begun in July, moves marketing skills to the field. Forcing ad agencies to focus on sales makes them share the MDOs’ goals, and motivates shops to give MDOs strategic marketing ammunition. “They don’t want to put all these marketing experts in the field and then cut off the fuel supply,” says Ken Harris, partner with Cannondale Associates, Evanston, IL. “P&G wants its agencies to realize they’re joined at the hip with the sales organization.”

P&G joins a growing list of marketers adopting sales-based pay that includes Colgate-Palmolive and Ford Motor Co. Campbell Soup Co. began its system in August, shifting away from straight commissions that emphasize TV to a fee-and-bonus setup. Ad agencies get a fee based on estimated hours, with some profit built in. Bonuses follow a sliding scale of sales targets: Hit 10 percent incremental sales, get this much. Hit 20 percent, get this much more.

Simply put, “marketers want a 360-degree view,” says Mitch Meyers, chief operating officer of The Zipatoni Company, St. Louis. “If you only show a client TV commercials, that leaves it up to their marketing people to figure out what the in-store displays and the trucks will look like. That’s too much work for the client.”

Many marketers don’t have enough staff to spin out an ad into that 360-degree view. Plus, packaged goods companies rotate brand managers so frequently, they’re used to relying on promo shops to get new managers up to speed.

Going to school on retail

The first job for P&G’s agencies is to improve broadcast media, so they won’t need to know what retailers are thinking – yet. Soon, though, ad agencies will be forced to learn retail and start paying attention to the client’s sales force. That’s traditionally promotion territory, and ad agencies are famous for shunning it.

“Ad agencies don’t want to know about retail. That stuff gives them the creeps,” Meyers says.

Einson Freeman chairman Jeff McElnea recalls a conversation with a client’s ad agency. “The senior-most account director didn’t even know the name of the head of sales, and didn’t even care. That will have to change. This is the first step. In the hands of the sales force lies more of our destiny than ever before. It won’t be long before we see ad agencies with offices in Bentonville.”

Packaged goods marketers’ strategy shift is driven in part by retailers’ evolution to “retailtainment” from everyday low pricing. Remember the ’80s? Wal-Mart’s EDLP strategy forced P&G and others to back off promotions and funnel money into cutting costs of goods instead. P&G lost the flair it honed in the ’50s and ’60s with catchy tactics like giving a free goldfish to every kid whose mom bought a P&G product, recalls Burt Flickinger, managing director at Reach Marketing, Westport, CT. These days, Wal-Mart’s penchant for “retailtainment” has P&G and others reestablishing consumer promotion momentum. “In the Jager years [under ceo Durk Jager, renowned for his attention to retailers], agencies will have to support P&G’s strategy of working closely with top retailers,” Flickinger says.

Retailer consolidation will be a huge advantage for promotion agencies that have strong relationships within the retail power base. Consolidation also may straighten out the pipeline of execution, making a cleaner equation to measure results (see box below). “I don’t think ad agencies realize how many breakdowns there can be in the channel of execution,” says McElnea. “It may be two or three years before reality sets in and they see how tough it is to control.”

“Agencies are swimming in waters they never swam in before,” says Jon Kramer, president of J. Brown/LMC Group, Stamford, CT. “This takes them out of their existing skill set and makes them work with people at the client they’ve never worked with before – logistics, operations, promotions.”

“Right away we’ll see ad agencies plus up the promotion side of the business, with more acquisitions and collaboration between ad and promo agencies,” predicts Cannondale’s Harris. “Promotion pros will become ad agencies’ `native guides’ to retail.”

After all, no one wants to ask the client those naove questions neophytes always ask when learning a new business. Since ad agencies and their parents have been buying up promo shops the last few years, they have ready-made tutors in-house.

Miller Brewing asked Zipatoni to help bring its new ad agencies, Ogilvy & Mather and J. Walter Thompson, up to speed. “Miller fosters partnership so well that we want to work closely with the new agencies,” Meyers says. Plus, it helps keep Miller’s advertising and promo teams on the same page as they coordinate promos’ long lead times with new ads.

Collaboration brings promo agencies new respect. “Clients think about our account people differently than the account people at their ad agencies,” Meyers says. “Clients tell me, `Your account people help us think.’ Well, that’s because promotion is so much more involved than advertising, and we have to think of all the different ways to skin the cat.”

Here’s the caveat for promo shops as native guides: Know your stuff when ad brethren come calling. With all eyes on retail, any weak links in your retail execution will show plainly, and painfully.

Why promotion agencies don’t get it

Marketers have not yet extended sales-based pay to promotion agencies for two reasons: Most promos are project work, and too many external factors can influence a campaign’s results. “So many pieces of the puzzle affect sales,” says Zipatoni’s Meyers. “If you can’t control those, you’d feel gypped.”

Campbell’s promo shops still get paid only a fee, no bonus. “The promotion plan varies so much year to year, it’s hard to put promotion agencies on the same plan,” especially since most promo is project work, says director of consumer promotion Kevin Tripp. “And there’s a perception/reality issue, too. Top executives think advertising drives more sales volume than promotion.”

Clients may be converting their biggest budgets first, suggests McElnea. “Clients seem more comfortable moving linearly, so there’s a delay – not an avoidance – to extend the system to us.”

Two things have to happen before sales-based pay comes to promo shops. Clients need more agency-of-record assignments – a likely outcome as more packaged goods companies consolidate assignments among fewer shops – and the new system needs to work with ad shops. As P&G prompts more non-media work from its agencies, it’ll end up measuring more than ads. Once marketers see how to measure the impact of all marketing elements, they’d be silly not to extend the deal to non-ad agencies. P&G may, once it works out the strategy with ad shops.

P&G “may get ad agencies to pay attention to retail, but that still doesn’t mean they can control it,” Meyers says. “I think we’ll see agencies build in a profit margin they can live with, and then a sales-based bonus is truly icing on the cake.”

Campbell’s Tripp predicts marketers will “tiptoe in, probably starting with co-marketing, since it’s a hybrid. P&G and Kraft may try it, and then agencies may start selling it in.”

It’s the best way to continue the evolution of promotion as strategic marketing that’s complementary – and equal – to advertising. The question isn’t “if,” but “when.”

The “measurable” discipline of promotion, the one traditionally linked with sales, is harder to track – and therefore, compensate – than advertising. Promos go through retail/wholesale/distributor channels, so execution isn’t as “pure” as direct-to-consumer advertising. Promo shops can’t control all the elements of their campaigns, the argument goes, so they shouldn’t be held liable for results. Ads, on the other hand, don’t go through the messy network of retail, so the correlation between media advertising and volume sales is easier to measure. No one other than the agency is stirring the pot.

The industry is at a crossroads now, and it could go three ways. Marketers can push for more behavior-based marketing (heavy on promotion) and either pressure their ad agencies to bring it to them, or channel more money directly to consumer promotion budgets. Or, marketers can stick with the easy stuff, and keep leaning on media advertising because it’s cleaner.

The real question is: Will marketers ever make the connection they want between marketing and sales if they don’t get into all that messy retail stuff? If they commit, who’s best suited to handle it?

Jon Kramer, J. Brown/LMC Group: “I’d love to get paid on sales results because I’m much more accountable than advertising. Clients have asked sarcastically, `Do you want me to pay you when I make a profit?’ I say yes, and they immediately have second thoughts.”

Jeff McElnea, Einson Freeman: “We won’t sit back and wait. We’ll be in there negotiating [bonuses] before long.” Dominoes will start to fall months, not years, from now, he predicts, starting with consumer packaged goods. Other industries will follow quickly “because the logic is very strong. We’d like performance-based pay as long as there are qualitative measurements and bonuses are based on a break-even basis.”

Mitch Meyers, Zipatoni: I’d be very interested to try it, but I wouldn’t bet my whole profit margin on it.”