Agencies Must Embrace Performance Pricing

Old-school agencies, be warned: Your clients want you to put your money where your mouth is.

Pay-for-performance models have moved from throwaway lines at industry conferences to reality as marketers realize the value of tying agency compensation to bottom-line results. The new model is a hot trend, with its own buzzwords and metrics. Inevitably, it’s one that’s a bit like New Year’s resolutions: Many talk about it, but few actually follow through.

Many agencies will trumpet a performance model that, in the eyes of the client, isn’t really one. Risk-sharing in the form of bonuses and small portions of an agency’s overall fees is a step in the right direction for the agency, but it’s an insufficient one. When you peel the layers back, it becomes more about perceived risk share than actual risk share, with very little skin in the game.

We’ve also seen more than a few agencies using the term “pay-for-performance” as a replacement for cost-per-click or cost-per-lead. Though more tied to performance than impression models, leads aren’t sales, and they still represent a cost to the marketer. If you can’t close the loop on that piece of the puzzle, then it’s fair to ask, what kind of performance is really being delivered?

Agencies are being challenged to directly answer the question, “Does a user clicking, calling or filling out a form actually convert to a sale?” Questions like these will only grow in popularity as more and more brands demand true accountability from their agencies, and yet too few agencies are responding with actual, data-driven metrics. Here’s proof: According to a recent report from the CMO Council titled “Optimizing Marketing Partner Performance,” 58 percent of marketers surveyed are unsatisfied with the current process of measuring their agencies’ advertising effectiveness.

That’s a sign that goals are misaligned and valuable marketing dollars are being wasted on expensive advertising that fails to produce sales. As the trend continues, it seems that agencies that decide against true risk-sharing are taking a bigger risk: being left behind.

True goal alignment between the client and its marketing agency means holding each other accountable for the only metrics that really matter: revenue, customers and profits delivered to the business. Risk-sharing based on these metrics represents the best possible relationship between partners. Both are aligned to deliver bottom-line results, and both benefit if the mark is achieved.

As CMOs feel the pressure of added accountability from their organizations, that pressure is rightly being shared with their agencies. The message is clear: If you’re confident in the results you can deliver and you’re looking to build a long-term client relationship, now is the time to share the risk and offer clients true alignment.

This shift is not only happening in the marketing/advertising world. Clients are also driving pay-for-performance models through their other “service-provider” relationships. Both legal and accounting firms, long the bastion of fee-based models regardless of performance, are now moving into performance-based compensation models, driven by the same need to both justify and align investments with outcomes. Sound familiar?

Many agencies may balk at pure performance models because there are many variables beyond their control that make (or fail to make) registers ring. The reality is that as more media formats become digital, there will be better results tracking in place. With better tracking, comes better measurement and data. And once there is better measurement and data, well, you can guess what comes next.

The reality is that this evolution is about far more than how agencies are paid. It’s about how they engage with the brand, entrench themselves in the business and find ways to drive the right outcomes that make those registers ring and not merely highlight the many reasons why they can’t.

The shift here is inevitable. CMOs expect more. They’re looking for internal and external partners who truly understand marketing’s responsibility beyond brand impressions. Those who can build a brand by directly building revenue and share are the ones that will endure as the CMO’s true partner.