We need to reframe the debate on outcome-based pricing
As client relationships come under scrutiny for their impact on agency staff, Neil Stewart, global chief executive officer of commerce and technology at Wunderman Thompson, turns his attention to another problem area: pricing.
The industry is undergoing a fundamental shift in the agency/client relationship
Right now, if you’re in the agency pitching business, you’ve probably had more than one discussion about outcome-based pricing. The idea is that agencies and their clients share in the risks and rewards of any project.
Unfortunately, there is no one definition of how this should work, and it can conjure up some scary visions. Is the idea that agencies should now guarantee the success of their campaigns – or face downside risks? Or that they and their clients are going to share both the investment and profits of new products? Either possibility would likely send agency financial officers into a tailspin. But that’s not what is really going on.
Instead, the industry is undergoing a fundamental shift in the agency/client relationship. I know that everyone has heard that before, but trust me, this time it’s different. Essentially, we are all moving from a waterfall to an agile approach.
Previously, an agency would devise a massive creative campaign, launch it according to a set schedule (usually seasonally), and then step away. If it didn’t go well, it was quite easy for the client to bring in a different agency the next year.
The agile relationship is the result of a positive development that has been ongoing for some time: digital transformation. After a decade of adopting new technologies and ways of doing business, clients now have different needs that require a closer partnership, one that is fundamentally centered around innovation. Agencies are no longer required to provide a seasonal deliverable; they are being tasked with creating platforms and ecosystems that deliver continuous value and require constant attention.
The tech industry provides a good analogy for this development. Decades ago, technology companies sold hardware and software in transactions not much different from how they might sell desks and chairs. Often, this resulted in spare, unused capacity – or a customer making emergency runs to a service provider to meet unexpected demand. Today, that has transformed into a world where companies pay a cloud services provider for both software and computing power as needed. Rather than buying boxes of stuff, they pay for value.
Things are similar in the brand/agency world. An agency might now set up a platform for a client based on, for instance, Sitecore, Adobe or Salesforce technology, and then provide continuous support for years afterward, adding to and improving the capabilities that the platform provides. This may well involve developing new ways of implementing those technologies, baking in bespoke tooling and solving problems in ways that can be useful in other contexts. In short, they’re providing a continuous level of innovation that can dial up or down as per demand.
Think of it as a two-way street, with risk shared with both the client and its agency. Clients would have a customized stake in their agency’s R&D. Of course, the two parties can then negotiate how the products and tools created from these shared investments will be used, so both parties benefit from the innovation and share in the rewards.
As a result, partnerships are springing up across the industry that require a new approach to compensation, one that takes the value delivered by a project into account and encourages brands and agencies to share the risks and rewards involved in developing it.
Outcome-based pricing is not a way to introduce a new and frightening level of accountability into the agency/client relationship. It is the result of a transformed world, in which micro-brands, new features and new routes to market are launched daily. Far from taking an adversarial posture, clients and agencies are now involved in collaborative innovation, in which both sides are in it for the long haul.
Brands have reached a new and more complex phase of the transformation process. They no longer need agencies to help them get started. Instead, both are in a position where they can start to reap the rewards and create value together. Be it a new product, sub-brand or experience, it is just the start of the journey.