19
Sep
09

Pay for Performance. Bring it on if you dare

Over the years I’ve been a big proponent of pay for performance when it comes to engaging clients as a marketing firm. What could be better? Clients love the concept because both parties have skin in the game and we get paid according to how effective our work is. The assumption is that we’ll do better work, go the extra mile and deeply care about the client’s success. Everybody’s happy.

However, the reality is not so simple. There are a number of issues that raise their ugly heads every time I’ve attempted to implement such a compensation strategy.

Issue #1: Most clients and agencies don’t really understand how pay for performance (PFP) works.
Most expect the firm to work for free and then be paid only if the work delivers some predefined performance – usually revenue. If the goal is met, the client will then pay the firms normal rate. Why it doesn’t work: The problem here is that no company can stay in business working for free. The other issue is that there needs to be compensation for risk – above and beyond what a firm would earn if they weren’t taking on the risk of the client (plus their own company’s risk).

The solution: The service provider agrees to a specific scope of work at a rate that covers it’s overhead plus out of pocket expenses. This would give the client a significantly lower rate for the work. If the agreed upon metrics and milestones are met, the agency would receive their usual profit margin PLUS a bonus to cover the risk incurred. This is not unlike what an investor requires. In effect, the agency is investing in the client’s business (taking on the client’s risk) and should be compensated above and beyond it’s usual “no-risk” rates. The greater the risk, the higher the compensation.

Unfortunately, clients don’t like this idea even though they are still coming out way ahead and have significantly reduced their risk. The choice is to simply pay the agency and shoulder the risk that the effort may or may not work or transfer the risk and pay a premium.

Issue #2: Metrics and goals not within marketing’s control
Most clients demand that an agency gets paid when they get paid. In other words, if an increase in revenue can be tracked directly to the agencies work, the agency gets paid. The problem here is that there are a myriad of variables that effect the realization of revenue. For example, the sales team is less than effective, the product isn’t good, lousy customer service prevents repeat buyers, market conditions change, supply chain problems, etc.

The solution: The client and agency need to agree on metrics that are measurable and tied to agency performance overall. Often, “leads” are the preferred metric. However, there are often arguments over lead quality, suitability and viability. Another challenge is tracking leads to specific activities – did the lead come from an ad? A press release? The web site? The reality is that an integrated marketing program should be measured as a whole and with a few exceptions (Pay Per Click) cannot be tracked to individual tactics.

Issue #3: Handing over the keys to marketing to the agency
More often than not, clients pick and choose what they want the agency to do allowing only certain activities to be performed by the agency. For example, the agency may insist on doing research to ensure a positive outcome (what everybody wants) but the client doesn’t think it’s worthwhile. Or the agency may build a campaign with certain response mechanisms that the client later changes. From planning to research and implementation, the agency works on a piecemeal basis with little control over the work.

The solution: The client must follow the agencies process and recommendations – including budget. The agency must also be allowed to work long enough for the strategy to work – even if the first six months don’t produce results. If the agency is going to take on risk, the client must do what the agency says. If the client doesn’t trust the agency to work in its best interest, they shouldn’t engage them in the first place. Effective marketing and promotion almost always takes more effort, money and time than any client prefers.

Again, this issue is usually a deal killer for the client. They typically refuse to allow the agency to do what it knows works. The result is a less than effective effort and everybody loses. Issue #4: Disclosure Tracking financial performance (or other metrics) takes time, money and effort. Many clients are uncomfortable sharing financial information or doing costly research to confirm that the agencies work is having a measurable impact. PFP also requires extra legal fees to create and enforce the agreements – thus raising costs even more.

The solution: There needs to be transparency and trust for a PFP arrangement to work. The process of disclosure and confirmation should be spelled out in the client/agency agreement at the beginning.

The above issues are only the tip of the iceberg when it comes to PFP. Any marketing firm or agency that’s any good welcomes a fair PFP agreement because we know our work is effective. In my experience, it is usually the client who ultimately decides that PFP won’t work.

Please post your comments on this topic. I welcome disagreement from my peers and from client organizations. How can we bring agency compensation into the 21st century?

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4 Responses to “Pay for Performance. Bring it on if you dare”


  1. September 28, 2009 at 7:45 pm

    Though different than the arrangements you discuss above, our company, MediaBids.com, has been working with a performance-based pricing model for print advertising. For years marketers have been demanding better ways to measure the effectiveness of their print advertising. With the advent of online advertising, marketers have also become used to paying for each ad on a CPC, CPL or CPA basis. Our advertiser clients are very happy with this payment model, and I anticipate more marketers looking for a performance-based payment structure in other media moving forward.

  2. 2 David Igiyum
    November 1, 2009 at 8:46 am

    When you talk about “bringing agency compensation into the 21st century” I’m guessing you are speaking about “your” agency..

    There are lots of successful marketing companies doing very well. If you provide bottom line value to businesses they will keep you well paid. If you are like the other 80% of “MARKETERS” who are providing “inside the box business services” that any intern can perform. Of course you would be looking for new ways to be compensated.

    Provide real word, mensurable value to local businesses and everything else will take care of itself.

    1) direct mail, building websites, “social media experts”, email marketing, seo, Lead generation, Pay per click campaigns, are all services that most interns can perform these days from 10-20$ dollars an hour. passing these services off as HIGH LEVEL MARKETING will leave many marketing experts looking to re-invent the wheel.

    the following paragraph “The solution: The client and agency need to agree on metrics that are measurable and tied to agency performance overall. Often, “leads” are the preferred metric. However, there are often arguments over lead quality, suitability and viability. Another challenge is tracking leads to specific activities – did the lead come from an ad? A press release? The web site? The reality is that an integrated marketing program should be measured as a whole and with a few exceptions (Pay Per Click) cannot be tracked to individual tactics.”

    has so many flaws, welcome to 1985 if you need ideas on how to track traditional marketing efforts email me.

  3. 3 pmonfre
    November 1, 2009 at 3:37 pm

    David,

    Thank you for commenting. While your approach seems to be condescending and attack oriented, I’ll respond in the spirit of discussion. The article may not have been as clear as it could have due to the complexity of the issue and need for brevity, so I’ll give you the benefit of a doubt.

    If you read the article, you’ll see that I am a proponent of PFP and I believe that it can work if expectations are aligned and realistic.

    First, I don’t have an “agency”. The article is intended to help agencies (marketing and otherwise) better understand the dynamics involved in pay for performance. I’m trying to educate both sides (agency and client) as to what could work since each side only sees the issue from it’s own perspective. I notice that you didn’t disagree with any of the following specific points:

    • the agency can’t work for free until the marketing program pays off
    • there is a sharing of risk involved and compensation should reflect this risk
    • the ability of the client to actually close a sale is outside the agencies control,
    • the client can’t pick and choose recommendations – they have to follow the agency’s programs and process

    Your assertion that “direct mail, building websites, “social media experts”, email marketing, seo, Lead generation, Pay per click campaigns, are all services that most interns can perform these days from 10-20$ dollars an hour. passing these services off as HIGH LEVEL MARKETING will leave many marketing experts looking to re-invent the wheel.” has nothing to do with the article, nor did I suggest that these activities are “high level marketing”. Marketing agencies should be compensated for SETTING STRATEGY. You are also falling into the trap that the tactical activities you mention do not require a high level of skill or qualifications. I’m thinking you do not run or own an agency or you would know better.

    With regard to your final comment about tracking – upon reading it again, I can see that I wasn’t very clear. I’m not saying it isn’t possible to track traditional tactics, I’m saying that making go/no go decisions on individual tactics doesn’t tell the whole story – it is valuable to know what’s working or what’s not, but ultimately the performance of a marketing program should be judged on the overall improvement of the client’s position. It’s not about tactics – it’s about results.

    I notice that when I Google your name, there is not a single result. I also noticed that you didn’t post up a link to your highly successful agency.

    I’m sure that you’re attitude that “everyone is an idiot except for me” works very well for you and that you have a long list of successful and prominent clients who are happy to settle for work done by interns. Kudos to you.

  4. March 6, 2010 at 12:37 am

    Great Blog!……There’s always something here to make me laugh…Keep doing what ya do 🙂


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Who is Pete Monfre

CLICK HERE to visit my web site

I'm a serial entrepreneur, marketing and media guy, raconteur, writer, producer and consultant. I write this little blog to help you unravel the mysteries of marketing and selling, to expose the silliness that masquerades as marketing and help you make better decisions that will grow your business. And I have fun with it. Why not comment? That way we can have a conversation. Or better yet, hop on over to my web site and drop me a line.

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