Back in 2013 I was trying to scale an ecommerce store selling accessories for mobile phones, working with several different performance agencies to increase our revenues.
My biggest frustration?
A good proportion of the performance marketing agencies we hired didn’t actually deliver improved performance.
Looking back that was probably a lot to do with how we remunerated them.
Worst still, almost every performance agency that I’ve come across bills on either a day rate or percentage of media spend, with no performance-based incentive.
This is similar to the management consultants who are continually bashed by the chief executives of large corporates for coming in, charging huge hourly fees and then walking out with their huge fee, irrespective of whether their advice actually improves performance or not.
Buy outcomes, not time.
At the end of the day when you appoint a performance agency, you’re effectively looking to buy an outcome.
That might be to generate more leads, increase revenue if you’re an ecommerce store or improve lead quality, for example.
You’re not looking to simply buy their time.
In fact, it's staggering that in a space like performance marketing where results are so measurable that agency fees are not remunerated based on performance.
In similar disciplines such as sales, it’s widely recognised that using performance-based incentives based on the number of appointments a salesperson books, or the amount of revenue that they drive, delivers considerably better performance compared with paying them a flat fee.
My solution: the hybrid pay-on-performance model
The days of billing on a percentage of media for platforms like Google Ads and Facebook are limited.
It made sense when the big TV buyers like WPP and Omnicom were part of the supply chain effectively negotiating the deals with multiple TV channels and acting as a single point to purchase your TV inventory through.
But now with advertisers having a direct relationship with the platform, the job of the agency is to be an expert consultant and technology partner advising on strategy, not to be a link in the supply chain, and they should bill as such.
Taking a page from the book of sales, my suggested model would be to remunerate agencies on a hybrid model where some of their fee is flat and some of it is based on performance.
Considering the lack of accountability with flat pricing, you might ask why would I include this in my model.
The reason is twofold. Firstly the flat fee should cover the maintenance of keeping the performance of the account where it is.
If you didn’t have an agency you would still have to bring in an in-house paid search person to run your account and there is a cost to maintaining the current account.
Secondly it helps you get the best people. After all, if you’ve got a huge account that will take 20 days a month to run and you only expect a small increase in performance (by a few percent), and you are willing to only pay a few thousand per month, no good agency is going to be interested in it.
The second element of the hybrid model is of course the performance aspect, which I think should be based on the increase in performance from a base level - the level at which the account was taken over.
Above that, fees should be based purely on performance. This can be structured in several different ways but should always be linked to your goals.
Those could be an increase in leads or revenue, or a mixture of metrics such as the volume of leads and percentage of leads that become MQLs.
Wesley Parker is managing director of Clicteq