{{ searchResult.published_at | date:'d MMMM yyyy' }}

Loading ...
Loading ...

Enter a search term such as “mobile analytics” or browse our content using the filters above.

No_results

That’s not only a poor Scrabble score but we also couldn’t find any results matching “”.
Check your spelling or try broadening your search.

Logo_distressed

Sorry about this, there is a problem with our search at the moment.
Please try again later.

There's a long history behind how agencies are compensated for their efforts, but that doesn't mean that everybody is satisfied with agency compensation.

At one time, agencies were typically paid a commission. Clients didn't like that. Today they're generally paid by the hour, something that both agencies and clients alike find reason to complain about.

On the client side, paying for an agency by the hour comes with risk. As agency veteran and marketing consultant Avi Dan points out in a Forbes.com guest piece, "the biggest problem with hourly fees is that they do not separate the sheep from the goats."

He explains:

...by letting input dictate the worth of an agency’s output, Advertisers in essence reward a bad idea equally as a good idea. In fact, In an Alice of Wonderland world, because it takes more billable hours to get a bad idea revised before it is brought up front to customers, Advertisers actually reward an agency more when it comes up with a bad idea.

So what's the solution? Dan suggests that there's an obvious one: pay-for-performance.

Aligning interests

On the surface, pay-for-performance seems to provide a means to align the interests of agencies and their clients. Agencies want to make money, and clients want to make money. In theory, if an agency does its job well, its client will reap the rewards, so tying agency compensation to client success makes sense.

Obviously, the metrics by which success is measured are all important. Dan believes there are numerous options here, and he favors "brand advocacy, efficiency, and continuous gains in profitable sales...because they relate to shareholder value creation." Obviously, the metrics used and the expectations around them are likely to be points of contention, but Dan believes that eventually "Advertisers will seek partners who are comfortable with accountability, and partners who are willing to share in the risk and the reward."

So why hasn't there been more movement to a pay-for-performance model?

Can an agency really make it rain?

The answer is simple: agencies are not rainmakers. The best agencies can provide high-quality services and deliver stellar work product, but that doesn't guarantee outcomes. Great ideas don't always produce success, and great work product developed for a concept that is even slightly off the mark can fail to deliver results.

Naturally, the metrics clients would be most interested in using to determine pay-for-performance compensation will be based on outcomes, not quality of service and work product, which means the interests of agency and client aren't really aligned. Even worse: such a model implies that agencies alone are responsible for outcomes. If they do a good job, clients can sit back and watch the money roll in.

The best model: stop-paying-for-poor-performance

That's simply not the case. At the end of the day, clients are ultimately responsible for their own success and making sure that all the pieces required for success are in place. An agency, for instance, could create a wonderful ad campaign for an internet brand, but if the brand's website isn't optimized for conversion, the ad campaign probably won't drive sales.

And therein lies the rub: agencies rarely have control of product, customer experience and the last mile of the sale. Without control of these things, seeking to compensate them on performance seems incredibly misguided. 

That, obviously, doesn't answer the question, "Is there a better way than the billable hour?" If pay-for-performance isn't a viable approach to agency compensation, there is a simple way clients can minimize the amount paid for unsatisfactory work: stop paying for poor performance.

If you hire a web developer who can't build a functioning website, or a designer who can't create a quality visual experience, you don't continue to pay them. You find another web developer or designer who can get the job done. Why should the dynamic be any different with agencies? The answer: it shouldn't be.

The good news is that, as pointed out by MediaPost's Steve McClellan, talk of pay-for-performance hasn't translated into real demand for it. But frustration over compensation is real and until less-than-satisfied clients start to think critically about what they expect from their agencies, don't expect the frustration to go away any time soon.

Patricio Robles

Published 8 February, 2013 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2402 more posts from this author

Comments (9)

Comment
No-profile-pic
Save or Cancel
John Courtney

John Courtney, CEO and Executive Chairman at Pay on Results SEO, Content Marketing, Social Media, Digital PR, PPC & CRO from Strategy Digital

I couldn't disagree more!

We are really happy with our PAY ON RESULTS model, as are the majority of our clients. We do performance pricing on all of our services - SEO, PPC, CRO (conversion rate optimisation), even Social Media and now Content Marketing.

As to the comment "clients are ultimately responsible for their own success and making sure that all the pieces required for success are in place. An agency, for instance, could create a wonderful ad campaign for an internet brand, but if the brand's website isn't optimized for conversion, the ad campaign probably won't drive sales." it depends what services are provided. For example we do SEO and CRO in combination so we are not only driving quality traffic but helping it convert better. Hence we can price on a percentage of extra sales.

PAY ON RESULTS isn't a flashy pricing model with smoke and mirrors. Quite the opposite, it's old school - we do a good job and we get paid when we perform. Because we have been in digital marketing for 16 years (2 years before Google) we have solid processes and 40 great in house staff that together we have confident will bring results for clients. And our 500% growth in 6 years says that we have.

Are there risks for the agency in this model? Oh, yes! This is our seventh year doing PAY ON RESULTS and I guess in the first two years we lost money half the time. And that's probably why the model hasn't been taken up by many agencies. But we have worked and worked at the model and now it's a profitable partnership between ourselves and our clients. And our best relationships are performance based ones as both companies objectives are aligned.

over 3 years ago

Avatar-blank-50x50

Ketharaman Swaminathan

It might be difficult to link compensation to outcome for work related to brand building, SEO and Content Marketing. That said, at the highest level, the agency's success lies in the advertiser's success, so we're always open for a pay-for-performance model when we can participate more closely in the actual sales process. For example, when we do PPC, we also take ownership for the landing page, so that we can help our clients enhance conversion rates.

over 3 years ago

Avatar-blank-50x50

Alastiar Brian

It can not be done for every job. At-least not when it comes to SEO. Paying some base amount sharing rest on the performance can be done. Lets say if we commit that Ok we will pay when your SEO show the ranking. It might happen that person if not getting desired result can use black hat techniques to rank earlier and higher. This will not be Good for the long run survival and what if you lack in understanding the basics of SEO, how will come to know about that?
Better not to create agency theory hear. Pay for work done and share more reward when u get better results.

over 3 years ago

Simon West

Simon West, Chairman at Nett Sales LLP

The biggest obstacle we find with a payment for results model is that clients often don't engage with the process.

There is no downside for them if things don't work out, so they don't take the actions needed for campaigns to succeed.

Compare this to our usual fixed monthly fee clients who know they are a paying for a service and want to get the most out of our (very reasonable!) monthly fee! They are engaged and therefore get far better results.

I'm sure there are some situations where pay by results does work and John shows in his comment that SEO/PPC is one such area.

In our situation, clients often have to enter into a 3 to 6 month sales cycle to turn the lead we generate into profitable business. And their skill during that time is crucial to the end result, so difficult to define value at the point of lead generated.

over 3 years ago

John Courtney

John Courtney, CEO and Executive Chairman at Pay on Results SEO, Content Marketing, Social Media, Digital PR, PPC & CRO from Strategy Digital

Yes good points Simon. There are pros and cons with both models and we have several clients on fixed fees and some even on a hybrid fees/performance basis.

However, "Alastiar", results to us do not mean just rankings. Rankings are just a stepping stone to traffic which has to convert and therefore the ideal performance is on increased sales. There are a few doing "results" which are based on just a few phrases ranking well. This on it's own is fool's gold in my opinion.

over 3 years ago

Avatar-blank-50x50

Neale Gilhooley

Sadly Clients and Agencies will always battle over fees. We have to negotiate the fees for Clients before we deliver the work, then when the Client see's the true value that they are getting from our work they thank us but don’t come back and reward us financially, they just pat themselves on the back for being so clever in hiring us.

over 3 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

John,

If you are able to, I think it would be really interesting if you shared the metrics by which your performance-based compensation is based.

Your last comment suggests that sales is the ideal metric, but is that what you're actually using?

over 3 years ago

John Courtney

John Courtney, CEO and Executive Chairman at Pay on Results SEO, Content Marketing, Social Media, Digital PR, PPC & CRO from Strategy Digital

Patricio

Yes, we use additional sales from our work (a combination of SEO and CRO) as the pricing mechanism for ecommerce sites. It's real front line tin helmet stuff - if we dont bring extra sales we dont get paid.

Some sites of course aren't ecommerce. So then we have to go to the next best thing which would be goal conversion (filling out an enquiry form) or organic traffic (we guarantee it will be better quality than existing traffic, in case you are wondering - good SEO brings good traffic, and we only use good SEO methods).

over 3 years ago

Avatar-blank-50x50

Dezz Yung, Founder at Store Presta Modules - SPM

I'm sure there are some situations where pay by results does work

over 2 years ago

Comment
No-profile-pic
Save or Cancel
Daily_pulse_signup_wide

Enjoying this article?

Get more just like this, delivered to your inbox.

Keep up to date with the latest analysis, inspiration and learning from the Econsultancy blog with our free Daily Pulse newsletter. Each weekday, you ll receive a hand-picked digest of the latest and greatest articles, as well as snippets of new market data, best practice guides and trends research.