Media Buying Briefing: Performance or outcomes-based remuneration looks to be the future model
This Media Buying Briefing covers the latest in agency news and media buying for Digiday+ members and is distributed over email every Monday at 10 a.m. ET. More from the series →
If you do the work, you expect to get paid fairly. And if you do the work really well, you hope you’ll get paid more, right? So it is with media agencies, who are looking to get paid in different ways for their efforts on behalf of clients, after pretty much the same remuneration structure over the last 50 years.
Modern remuneration is edging more toward performance- or outcomes-based agreements — which offer media agencies considerable upside but also take on a bit more risk if the work doesn’t deliver (which isn’t always in the hands of the agency).
That traditional form of compensation most often revolved around man-hours and fees for buying media. But the advent of ad-tech and mar-tech tools, and reduced fees thanks to the impact of procurement on the client side. In other words, it’s a law of diminishing returns. Something had to change — and it’s steadily happening.
“We are hearing lots of discussion about the need to shift from a services model into what I would characterize as a solutions model, in which agencies are broadly compensated for the output or outcomes that they create, with less emphasis on the man hours and the FTEs that are typically billed out within scopes,” said Jay Pattisall, vp and principal agency analyst at Forrester. Pattisall said agencies need to find ways to get compensated for their investments in technology, from machine learning to ad-tech vendors and suppliers, to data, to generative AI.
Pattisall said he’s seeing more media agency scopes and compensation packages take this form: “As generative AI become more popular and prevalent across all marketing execution of media, I think the next step and the next evolution will very much be leaning into more performance-based compensation agreements, if not completely rewriting MSAs [master service agreements] around outputs or outcomes.”
One standout example in the agency space is Gale, a Stagwell-owned full service agency run by Brad Simms, who’s spent a lot of time and effort to understand what’s changed in the work agencies do for clients as a means to changing it. Simms cited research from consultancy Farmer & Co. that shows 20 years ago, a scope of work that 50 people worked on produced 360 assets, where today they produce 15,000 assets — but fees have been reduced. “This is the crux of the problem,” said Simms, who is also CEO of CPB.
“The worst thing that’s happened in the agency space is we’ve basically created a commoditization of the offering, and the pricing and the ask for scope reflects that,” he said. “The question is, who and where and how are we going to change that relationship? Because, frankly, it’s not working. I know because when I talk to CMOs, they want agencies that can drive growth. But the question is, how do you find those partners?”
The answer, he said, is to change to outcomes-based agreement. “We’ll put some of our fees at risk but let’s share in growth — however you define growth, Simms added. “For me, that changes the nature of the relationship from a commodity to a partner relationship. Then you’ve crossed into — we’re not buying widgets, we’re now buying outcomes. And now we’re having a narrative that feels very consultancy-like, although what we deliver is very different. That’s at the heart of the Gale strategy, which is not just to be a modern integrated agency, but also change the dynamic of the relationships we have with our customers.”
The challenge, especially for agencies that have done business with clients the traditional way for decades, is to change that model, and neither Simms nor other agencies have much of answer to that yet. “There is a way that you can do a reprogramming of an existing agency to change it but it’s a lot to change. It’s a lot of engines to change where you’re flying. So you really have to be really skilled at it or frankly, in complete free-fall in order to do it,” said Simms.
It helps that Gale does a lot of CRM-related work for clients including Hertz, noted Pattisall, which lends itself well to outcomes-based compensation.
But it’s not the only way to change the financial relationship with clients. Lauren Ramaska and Mary Ann Grajek, managing partners at independent agency Media+ in Seattle, said they rely mainly on complete transparency when negotiating with clients including regional brands Papa Murphy’s pizza, AAA Washington and Sound Credit Union.
The problem, said Grajek, lies in the fact that clients don’t want to commit to a budget. “But want us to commit to a fee, and so if our percentage is based off of a budget, they can’t commit to, it’s very difficult to define that scope.”
The solution, added Ramaska, is to clearly lay out exactly what it will cost the agency to execute on clients’ behalf. “A lot of that starts with just educating our clients now,” she said. “This is the team that you need in place to handle X, Y and Z services — and this is what it’s costing us. So we’ve been trying to have more of those educational conversations in trying to modernize our compensation.”
That includes a base level of cost-covering fee plus “let’s have some skin in the game with you with having some kind of fee off of your spend,” Ramaska added. “So if the media spend goes up, then obviously the agency makes money. If it’s down, we’re making less but the base level costs are covered.”
Bottom line for all agencies to remember is to think about what the client is looking for and then setting up a compensation model that gives them that, but also rewards the agency for its efforts, said Eric Perko, founder and CEO of indie shop Apollo Partners.
“There’s not just one way to set up a structure,” said Perko. “The biggest thing for us is always about value — what do you need and what is really important to your company? That’s where things like performance based pricing enter the conversation, If we hit these goals, there’s some sort of a reward for the agency at the end of the day.”
To Perko, what sounds easy on paper isn’t always so easy in execution when it comes to performance-based comp. “I haven’t seen that many instances where it successfully works. And I think there’s still needs to be a baseline comp model that allows the agency to exist and survive successfully, where they’re not really strained on resources before they get to that eventual state of reward,” he added. “There still needs to be a good enough base salary, where people can live. And then if you really knock it out of the park, then there should be a reward.”
Color by numbers
Attention metrics have been on the minds and tongues of many in the media agency world, given their ability to move insights beyond vague measures like viewership or simply impressions. But according to ad-tech firm Intango, the liberal use of the term of attention metrics has also sown confusion in the brand marketing ecosystem, according to a survey of 200 digital marketing folk. The survey asked only one question, and here’s what respondents said: 79% believe that the attention metric is “currently too vague and open-ended” and requires a “clearer, standardized definition to encourage broader adoption.” Another 15% were neutral, and only 6% disagreed.
Takeoff & landing
- GroupM and Amazon Ads announced two collaborations over the last week, including the launch of a bespoke Amazon Ads Excellence Monitor for Amazon Ads that blends collective intelligence from both companies to measure and monitor media investment in Amazon Ads; as well as a global collaboration to introduce creator-led shoppable content to the Amazon advertising suite of services available to its clients. The latter collab gives GroupM clients the ability to amplify creator content within the Amazon DSP and in Amazon Sponsored Brand placements.
- Horizon Media’s Web3 specialty shop Chapter & Verse will act as agency of record for Blockchains, a Web3 tech firm. The agency will not only shape Blockchain’s marketing, it will adopt the firm’s tech as well.
- Personnel news: Amidst a broader restructure, Will Swayne was named Dentsu’s president of the Media global practice, overseeing all media operations of the holding company … Publicis tapped Niel Bornman to be CEO of Publicis Media UK and chief product and solutions officer for EMEA, hiring him away from GroupM Nexus where he was EMEA CEO … Media.Monks’ chief media officer Melissa Wisehart joined Omnicom’s PHD in the same role … Media agency veteran Mainardo de Nardis joined the board of creative tech platform VidMob … Alexander Marshall was named president and chief growth officer of media agency Empower, hiring him from GroupM’s Mindshare where he was a managing director.
“AI’s ability to create time- and cost-saving shortcuts can also lead us to shortcut creativity and the nuances of audiences, which brings a risk of losing audience trust.”— Maggie Malek, president of CPB, talking to Antoinette Siu on how generative AI is impacting measurement
- Krystal Scanlon dug deep into the workings and missteps one year into Elon Musk’s remaking of Twitter into X.
- I wrote about agency Pathlabs and its role as the “ronin” of agencies, available for hire to execute all manner of media functions to agencies that need help.
- Marty Swant looked at the likelihood that CTV will attract significant ad dollars from political advertisers, thanks in part to a partnership between The Trade Desk and Comscore.
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