By Tim Williams
It surprises most agency professionals to learn that many clients are intensely interested in exploring a value-based compensation arrangement with their agencies. A recent position paper from the Association of National Advertisers (ANA) states it clearly: “Traditional metrics used in today’s cost-plus compensation agreements (usually based on time) have no relationship with the external value created for the client in today’s intellectual capital economy. Therefore, pricing should instead be based on results and value created.”
In our recent work with the ANA, Ignition has discovered that marketing, finance, and even procurement officials from client companies are actively engaged in internal discussions around value-based compensation. Our view is that if the agency community isn’t more proactive in this area, clients will be the driving force behind a change in compensation practices.
Selling outcomes instead of hours
From a client’s perspective, the chief frustration with the traditional cost-based compensation system is that they’re not sure what they’re really buying. Are they buying the agency’s time? Dedicated staff? A set amount of work? In the end, they don’t really want to buy any of these things; they want to buy results.
In a cost-based compensation arrangement, the client pays for efforts rather than results. Agencies log and charge hours regardless of the outcomes the hours produce. In a value-based arrangement, agencies and clients identify specific metrics of success and structure agency compensation around outputs instead of inputs.
Shared interests, shared risks and rewards
Value-based compensation works primarily for one major reason: it aligns the interests of the agency and the client. Both parties are working to achieve the same things. They both have similar financial incentives. Structured properly, value-based compensation agreements can also give both parties similar risks and rewards.
Imagine how this could change the dynamics of an agency-client relationship. Suddenly, the concept of “partnership” takes on real meaning. Clients start to view “risky” agency recommendations differently, because they know the agency has skin in the game. A new level of trust and mutual respect emerges, because both parties have a stake in the outcome.
Not just better margins, but a better way to run your agency
Over the years, your agency has undoubtedly become expert in costing. Now it’s time to become just as good at pricing. In fact, pricing should be elevated to the same level of importance as other core functions of the agency. In manufacturing firms, pricing is a separate department staffed by professionals who know how to get the most value from their products. The same can be done in agencies, either by appointing a Chief Pricing Officer or by forming a Pricing Committee whose job it is to assess the value of assignments and relationship and price them accordingly.
Value-based pricing is unquestionably where the marketing world is headed. The question is, who will get there first: you or your clients?