Pay-For-Performance: The New Industry Standard?

2017 is well on it’s way and as marketers, we recognize (as in any other year) that we’ll be introduced to new technologies and new channels to learn and ply our skills on. One constant, however, will be the existence of both brands and agencies, a relationship which has been fortified by the resurgence of the pay-for-performance business model.

Pay-for-performance models are a time-honoured tradition in the ad agency world. Clients establish what they would like to have done, pay the overhead costs, and then pay more if the agency delivers on its promises. But measuring success has become more challenging over the years. Quantifying the impact of traditional marketing channels such as TV, radio, and print is hard, because measurement tends to be slow, inaccurate, and lacking in actionable insights.

This has led to an industry where agencies have very little accountability to their brand clients; regardless of the impact on sales, market share, or any other key metrics a brand might be focusing on, the agency gets paid. The tides appear to be turning, however. In 2016 alone, $30 billion of marketing spend was put under review, citing a lack of transparency as the major driver. Brands and agencies operate in silos, without any frame of reference – brands put a lot of trust in their agencies, and agencies are dependent on their media partners. Sir Martin Sorrell, CEO at WPP, accused the large media and adtech players of “mark[ing] their own homework,” while Rishad Tobaccowala, strategy and growth officer at Publicis, asked “what in the world is going on when a buyer is told by the seller what the terms of the agreement are?” In addition, many brand clients are aggressively cutting budgets while expecting similar levels of service, which is forcing some agencies to narrow their margins in order to stay competitive. A common occurrence is junior staff working on multiple large accounts at agencies to save money, which can lead to a loss of quality for end clients.

So, How Can Pay-For-Performance Models Help The Industry?

Agencies cannot continue to cut costs and margins without adversely affecting the quality of their work. As digital marketing spends outpace traditional budgets, brands and agencies are more open than ever to rethinking their strategies. Thus, pay-for-performance models are re-emerging as a solution. While these types of arrangements are still somewhat unique to each individual engagement, the common thread tends to be that the agency can charge for its overhead costs up front, and the brands’ final bill is determined by a campaign’s performance against mutually agreed-upon KPIs. This allows brands to be more confident about their ROI, and it gives agencies the ability to be rewarded for above-average performance.

Transparency is becoming essential in the digital marketing space, and those who embrace it will certainly see a lift in opportunities. Some agencies have already moved over to a full pay-for-performance model, at least for some of their accounts. Omnicom Group and Merkle, who now control the accounts for McDonald’s and Warner Bros (respectively), have begun shifting to this model, citing accountability. In order for this model to work, however, brands and agencies need to collaborate by sharing data, aligning on their business goals, and agreeing on KPIs.

Both McDonald’s and Warner Bros have adopted pay-for-performance agency models

As pay-for-performance relationships continue to grow in popularity, with more big brands demanding transparent marketing practices, agencies must evolve in order to respond effectively. They must become more open and transparent, in order to remain competitive and build stronger relationships with brands. The concept of “upside” with respect to the results of a client engagement will allow agencies to benefit financially when they perform exceptionally well for their clients, and the fact that their overhead is covered lowers risk (although it stands to reason that an agency that consistently doesn’t outperform the agreed-upon metrics will lose clients).

Those who invest in centralizing, standardizing, and benchmarking their data before the rush will be able to capitalize on the complacency of their competitors in the agency space. To stand out in the digital world, agencies must be agile with their work, and they must arm themselves with the analytical tools to do so objectively. In order to set realistic metrics with clients (which will govern their compensation), agencies must be able to access industry benchmarks. The ancillary benefit for an agency is that they can use the benchmarks to inform their strategy recommendations and decisions. Contributing to industry benchmarks benefits everyone in the industry, and works in the long-term to drive transparency, trust, and honest marketing practices.

[READ MORE: WHAT DATA SHOULD I TRACK?]

If agencies adopt this mindset and become more transparent with their clients, a major evolution in the industry is inevitable. Clients will know upfront what their money will be spent on and exactly what they are getting, while agencies will build better trust with their customers and have a more objective idea of what tactics and strategies will work best for their particular objectives. More and more people in the industry are joining the chorus for transparency and honesty – this is the way forward. Join us!