Today healthy media commissions and the dream of a solid retainer or consistent project fees is a rarity
Agencies are having to invest up front in online ad platforms, measurement tools and analytics, while clients increasingly want transparency from campaigns and expect to see real-time ROI from their digital and tech-driven campaigns.
Conversely, a restriction on more traditional agency income streams is leading to declining agency margins, making it difficult to sustain investment up-front in tech and forcing agencies to review their commercial models of business.
The reality is that today healthy media commissions and the dream of a solid retainer or consistent project fees is a rarity. Digital and, in particular, media agencies must look to more performance focused, income-based revenue streams, and this requires a significant departure from the norm.
Client-side marketers are open to this approach. At the recent IPA Commercial Conference in London, debate reflected a growing sense that brands feel agencies aren’t commercially aware enough – an area, it was highlighted, that management consultants are starting to dominate.
Whilst consultants have a strong grip on commercial rhetoric and data analytics, agencies still possess a level of relationship building, creativity and innovation that is, to date, unmatched by consultants
The term "Positive Panic" was used by one panellist to highlight agencies’ need for a sense of urgency; ‘Positive’ in that whilst consultants have a strong grip on commercial rhetoric and data analytics, agencies still possess a level of relationship building, creativity and innovation that is, to date, unmatched by consultants. So it’s not too late for agencies to do something about it…but they had better get a move on.
However, a key stumbling block for agencies to adapt their payment models is that they must realise performance marketing is more than a catchphrase. It must become a functional part of a brand’s direct marketing, multi-channel marketing mix. Finding a way for agencies to deliver on this and provide higher value than perhaps the core brand KPI’s would otherwise call for, requires a true partnership between an agency and brand, and more importantly an evolved commercial model.
True exceptional value
Whilst performance based compensation has been around for some time, it generally goes no further than agencies risking some of their margin which they earn back if they hit specified KPIs. There is fundamentally nothing wrong with this model. However, the agency will simply end up where they began, assuming they hit the KPI’s, but with no additional incentive to create anything of true exceptional value.
Let’s now imagine something more extreme; a model whereby an agency takes a meaningful share of financial benefit via the creation of exceptional value (performance)
Let’s now imagine something more extreme; a model whereby an agency takes a meaningful share of financial benefit via the creation of exceptional value (performance). Of course there can be no reward without risk and the agency must take a proportionate share of any downside.
How can an agency safely open itself up to a share of the risk? The answer comes from its ability to find incremental audience reach coupled with accelerated conversion, without fundamentally expanding the cost base. The ‘magic’ that allows for this comes from a reconfiguration of existing information, predominantly via the consolidation of data from the disparate digital marketing channels and the ability to access real-time analytics that then go to drive the efficiencies. In effect, the agency has a way of expanding sales without significant expansion of costs. We call this an ‘efficiency value’.
Agency absorbs direct marketing costs
Now here comes the kicker! Take this one step further, the agency absorbs some, or all, of the direct marketing costs (’Pay-for-Performance Billing’); media, people, technology, etc, for an increased cut of the revenue generated via their efforts. This likewise can have an added benefit for certain clients, whereby the moving of marketing expenditure out of operating expenditure and up into cost of goods sold (COGS) can positively change the face of the P&L (and the marketing funding model).
At this point, we have a situation whereby the agency ceases to be an agency and truly becomes a partner. By shouldering such significant risk, the client will know that the commitment by the agency is absolute. Complete transparency and hence trust between agency and client can exist. Every decision the agency makes will, by definition, be for the benefit of both their client and themselves.
Sounds like Nirvana
Sound like Nirvana? Well it may not be as far away as you think. We are already being remunerated purely on this commission-based approach by a major security software company for our work across EMEA (Europe Middle East and Africa). It means discussion with clients about marketing budgets and retainers are no longer the focus, replaced instead by deliverables. Also, in Europe and North America we have been working with Avis Budget Group on a hybrid commission/retainer model for 18 months, which has shown to generate significant increases in incremental revenue for them with a corresponding reduction in cost of sale.
A highly commercial commission-based approach is certainly not without its complications and it’s not for every client, but for those looking to disrupt the old guard and eager to create sustainable, profitable agency growth, this important offering is a vital option. And remember, brands are keen to discuss this approach too. Handled carefully it’s a win-win for both parties.