Agency remuneration and the growth of output-based pricing

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One element of maintaining a successful advertiser-agency relationship is the agreement on fair pay (or remuneration) for the work that the agency does. To ensure fair pay, there are some simple principles to follow which the industry trade body broadly agrees on. You can find a guide from the IPA here.

Before we jump into the remuneration models, let’s take a step back and remind ourselves of the idea or principle of fairness. The concept and practice of fairness acts as one of the key responsibilities of the Procurement Marketing lead; to manage risk, ensure governance, and secure advantageous commercial arrangements.

 

“The Way You See People Is The Way You Treat Them, And The Way You Treat Them Is What They Become.”– Johann Wolfgang Von Goethe

 

Listed below are 5 fundamental principles of fairness in the advertiser-agency relationship:

  1. Fair remuneration for both Client and Agency drives beliefs and the overall human approach to your business
  2. Fairness requires transparency and agreement on the deliverables and cost structures
  3. Fairness ensures sustainability of the relationship, value for money, and profitability
  4. Fairness ensures you the Client are seen and continue to be seen as an attractive account
  5. Fairness ensures you get and retain the best Agency people, motivated and working on your account as opposed to your competitors

 

“Fairness Is Not An Attitude. It’s A Professional Skill That Must Be Developed And Exercised.” –  Brit Hume

 

So with professional skill in mind, let’s take another look at the principles outlined in the IPA doc and how they apply to a range of agency remuneration models. These agency remunerations models range from:

  • Input based schemes
    • Retained fees, based on time, and daily rates and multipliers for overhead and margin
    • Project fees, based on time, and daily rates and multipliers for overhead and margin
  • Commission based schemes or mark-ups on third party costs
  • Output based fees, based upon the delivery of different elements of work (Cost per campaign, or cost per TV advertisement etc)
  • Outcome based fees, based upon the results of marketing activity (Cost per click, cost per sale etc)
  • Value based fees, based upon the value an advertiser places on different deliverables.

The different schemes are best suited to different type of agency services, and different sorts of clients, and all have very different pros and cons. The pros and cons are important things to develop and establish for you and your situation – present and future. They not only set direction but drive attitude and form the epicentre of consensus. Flock has guided the World Federation of Advertisers (WFA) on Agency Remuneration and Performance Related Fees. If you are a member of the WFA you can get access to our presentations here. If you’d like to know which system is best for you, and how to make the shift from your current arrangements then do just let us know.

However, one remuneration system that is growing in use is Output-based fees. You may wish to think of Output-based fees as a series of “Lego blocks”. The work that agencies do is broken into a series of scope Lego blocks, describing a different marketing activity. For example, one large Lego block may be described as “a major launch campaign”, and a smaller block may be a “quarterly competitive review”. These individual Lego blocks can then be assembled to form differing Lego models or Agency deliverables. From a commercial point of view they also generate insights across brands, markets, regions, and different agencies on costs for delivering similar Lego blocks. If these Lego building blocks are agreed up front it enables everyone involved, from the seemingly painful, such as budget processes and reporting to ensuring the agency has foresight to resource the right people in the right place at the right time. You build and deliver fairness.

The Output-based blocks are described in detail capturing assets made, iterations, versions… The system recognises that many marketing activities are very similar, and repeatable.  Whilst the costs are initially built using the hours of work required to deliver the outputs, once set, the advertiser pays a fixed cost for the deliverables, not the time. The slide below shows the “ingredients” of an Output-based Package:

This scheme has several strong benefits

  • Simple to administer (once set up)
  • Helps drive marketing discipline and prioritization around scoping
  • Flexible, as marketing needs change through the year
  • Transparent
  • Accountable

As one of our clients put: “Each year I work with my agency to build “Scope Lego blocks” to look like the Millennium Falcon, and by the end of the year it looks like an X-fighter, but we all know what is going to be delivered; it’s fair, flexible and fully transparent”

So if you want to know how to build an output based remuneration scheme (or a Millennium Falcon from Lego), do let us know. You can contact Julie at julie.marshall@flock-associates.com.

 

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