More Advertisers Embrace Performance-Based Pay For Agencies

slug-all-purpose-with-layers-not-groupsHas performance-based pay finally arrived for agencies?

Traditionally, marketing services firms were paid on a set scope of billable hours worked by each employee on an account. But a growing number of advertisers are pushing for more tangible, ROI-based remuneration.

The biggest recent example is McDonald’s. The quick-serve advertiser’s RFP process specified that agency compensation would be linked to performance against business KPIs.

Omnicom Group won the account in August, and set up a new agency called We Are Unlimited to service it. The relationship will offer a case study for how pay-per-performance could work for holding companies.

Interpublic Group has also made headway after talking up performance-based pay for years.

Matt Seiler, former global CEO and chairman of IPG Mediabrands, was a huge proponent of agency revenues linked to client sales outcomes. He predicted in 2011 that the rise of programmatic would herald a new age of performance-pay models.

Today IPG Mediabrands gets paid on performance by roughly half of its clients, according to Chief Financial Officer Jeff Lupinacci.

“We should be held accountable to what the clients are held accountable for,” he said. “In some cases, we’re taking a big risk because we don’t control that outcome.”

Merkle, recently acquired by Dentsu Aegis, has been doing performance marketing for more than 30 years thanks to its focus on direct-response verticals like personal finance. But now it’s winning business in traditionally branding-focused categories, including the media account for Warner Bros., an indication that big brands are looking for more performance-based metrics.

For these models to work, clients and agencies need to align on business goals, and agencies need access to first-party data, said Merkle CMO George Gallate.

“If you don’t have that history or depth in analytics and data, it becomes very difficult to do performance-based media,” he said.

Without data related to sales, agencies optimize toward KPIs that reach to people who might be clicking, but not buying. But agencies will continue to optimize toward the metrics that compensate them, even if they don’t drive performance.

Legacy Structures

Generally, clients pay their agency to cover basic costs and bonus them when KPIs are met. KPIs can range anywhere from sales to length of a site visit. Defining what counts as a cost versus KPI varies for each client, notes Pivotal analyst Brian Wieser.

“Definitions are so critical,” he said. “What are costs? What are the services allocated to those costs? Getting to that agreement, then saying profit would be dependent in some part on the health of the business, is a much more realistic approach.”

Agencies are often hesitant to use sales KPIs because sales are driven by factors beyond media, such as pricing, store location and product quality.

“Proving that what you built literally drove someone to buy something is not necessarily a level of accountability that the agency wants, particularly if they’re not compensated to do it,” said Tim Jenkins, CEO of mobile ad platform 4INFO.

Likewise, brands don’t want to compensate their agency for sales they didn’t create.

“You can have horrible creative and media strategy but the business is doing great because the product is great,” Wieser said. “There are hundreds of thousands of possible factors, and you end up incenting that agency work.”

IPG Mediabrands uses direct sales as a KPI but often looks at proxies as well, such as gain in market share.

“It depends on what the client is trying to drive,” Lupinacci said. “We try to have it as close to sales as possible because that’s what’s driving the bottom line.”

Performance pay can take time to yield profit. That’s tough for agencies grappling with thinning margins.

“There are situations where we haven’t maximized as much revenue as we could’ve if we’d done it a more traditional way,” Lupinacci said.

UK-based performance marketing agency House of Kaizen made no profit from performance pay for the first year, said Alain Portmann, partner and head of strategy and insights.

Even now, he said, “the margin is not extraordinary, but its comparable to other models.”

But agencies can use sales results as leverage to negotiate better pay, he added.

“It changes the conversation completely,” Portmann said. “I have not met the head of procurement at these clients ever. I don’t have to justify my services.”

Know Your Audience

Performance models don’t make sense for every client.

Direct-channel marketers, like those in ecommerce or auto, are more open to using sales metrics, Lupinacci said. Rob Norman, chief digital officer at GroupM, pointed out that CPGs tend to be more conservative because their conversion event data is in the hands of retailers.

“Packaged-goods companies don’t control the end distribution of their product,” he said. “Tying back short-term or last-click measure to that is quite tricky to do.”

Measurement solutions like Nielsen Catalina and Kantar Shopcom help CPGs tie POS data back to media while providing analytics around factors that affect sales like stock-outs, merchandizing and lines. Tools like Media IQ provide transaction data on every impression that ties media back to sales.

But these tools only work when agencies have access to data.

“When data is available and informs the process, it ties advertising and media a bit more closely to business performance,” Norman said. “As we become more sophisticated in handling data and can join it more effectively with our clients’ data, our payment model will evolve.”

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