Stop paying agencies for the wrong things

First, brands are under budget pressures every year. They are expected to deliver increasingly better results for decreasing less money year over year. That means a brands’ partners are under similar budget and performance pressures.

Second, and this shouldn’t be a shocker. Agencies are businesses too. Whether part of a holding company, closely held or partnership, agencies are in business to make not just revenue but profit. They also have similar revenue goals every year that are derived through a combination of organic/existing client growth and new business revenue sources.

Third, traditional clients hire traditional agencies to be the efficient manager of their budgets.

Did you get stuck on that last one? I hope so. Let me say it again, traditional clients hire traditional agencies to be the efficient managers of their budgets. Now, I know what you’re thinking. If you’re a marketer within a brand, you’re reading this and saying, “Heck no. My agency is my business partner. They do what’s right for my business.” If you’re on the agency side, you’re saying something similar.

Sorry, but I completely disagree. Don’t believe me? When you last negotiated your contracts what did you spend most of your time negotiating? Labor rates? Overhead? The agency’s profit margin? What about the commission rate on media spend? Did you spend a lot of time negotiating on that? Of course you did. That’s how the vast majority of client-agency contracts are negotiated today.

How much time did you spend negotiating compensation based upon the achievement of a measurable outcome, like sales or stock price or any of the litany of KPI’s upon which true business growth, success and profitability are measured. My guess is that the answer is either “none” or “it’s too difficult to figure out, so we defaulted to what we know and that’s negotiating rates”. So, if you’re negotiating with your marketing partner on anything but business results, then you’re hiring that partner to be an efficient manager of your budget over every other thing they might bring a brand.

Under the scenario now in place between clients and agencies, the system is essentially designed for agencies to seek profits outside of what is in the clients’ best interests. That’s often because there is no other route to revenue and profits. Less often, brands beat up marketing partners to the point where there the marketing partner has to keep the topline revenue to stay in business but the relationship is actually no longer profitable. Pretty grim, huh? It’s a bleak outlook but, there is a way out and it’s actually not that complicated.

What if agencies were compensated based upon a brand’s business outcome, like sales? Every agency says their work is crucial to a brand’s success. Well, put your money where your mouth is. And, brands, why do you care how much money your agency partner is making if you see the business results that you want/need?

When we implement a relationship like the one above, agencies are truly business partners with clients. They will do what is in the best interests of their clients because your respective goals are 100% aligned. If the agency negotiates a “rebate”, they’re actually only hurting themselves by taking potential sales-driving dollars out of the market. Additionally, agencies are now incentivized to solve things like viewability and fraud because every dollar that is lost to a bot or to an ad unit that is not viewable by a live consumer actually hurts them financially.

We’ve been operating this way, at IMM, for ten years. We call it performance marketing and it creates a culture that is truly unique. For example, we started working on solving bot-fraud three years ago because the wasted dollars in market were not driving the sales that we are paid on. We’ve invested heavily in an IBM PureData System for Analytics because every efficiency we gain is more sales we drive for our clients. More sales, equal more revenue and profit for IMM.

So, how can you shift from a compensation model based upon negotiated rates to one based upon achieving business-driving results?

Well, our most successful relationships have historically been with clients who have a great handle on the economics of their business. They know the lifetime value of their customer, they know how much they can spend acquiring customers, and they have a good handle on the value of their retention strategies and budgets.

In addition to that, they are willing to have an open conversation with us about those economic realities as well as their business goals. Then, we’re able to take that information and build marketing plans that fit within those economics so that everyone is successful. The client is able to operate within an economic model that actually delivers business results and the agency is able to provide those services profitably.

Does it work every time? Of course not. Interestingly, that’s where some real magic happens because we’re able to show a brand exactly where the economics break-down, even if it’s just our ability to operate profitably. Then we either agree to move on as friends or we can sometimes change things so that the economics do work. If a brand is upset with us for telling them that we are unable to operate profitably, then that is not a relationship we’re interested in having. The bottom-line is that everyone gets what they need and the things that are most important are transparent.

Is it difficult? Yes, it’s difficult but it’s not impossible.

If a brand is unable to produce the kinds of economic visibility to make this type of engagement possible, then perhaps the brand leadership should be examining who they have running the business. How do you know what’s working and what your budgets are actually delivering today? If an agency is unwilling to tie their compensation to their performance, perhaps the agency is not that good or is selling the client what that client will buy, not what will actually move the needle.

Finally, when I say “tie compensation to performance”, I don’t mean some type of kicker on top of a retainer. I’m talking about tying half or more of compensation to performance. For many of our engagements at IMM, 100% of our compensation is tied to driving a sale and that includes media where we buy media on our dollar without sequential liability with our brand partner.

I hope agencies leaders are cringing when they read this. I also hope that brands are leaning in. Our industry is on the precipice. Brand bean-counters and agency entitlement got us here. We need to get back to basics. To do that brands and agencies need to think and act like business partners. Performance-based compensation between brands and agencies is one path and a great place to start.

Sean Baker is president of Boulder-based digital marketing agency IMM.