Performance-Based Marketing: A Winning Strategy for Agencies and Clients
by Moses Foster, West Cary Group President and CEO and Doug White, Chief Analytics Officer, West Cary Group
Part Three: Why PBM is Good for Agencies and Clients
It’s clear why clients should gravitate toward PBM. Who wouldn’t want to know whether they’re achieving a positive return on their marketing investment? Any senior executive who doesn’t want to know this probably isn’t savvy enough to remain in a top spot for very long. But why is PBM good for agencies?
Historically, many ad agency executives have measured the success of their firm based on the awards they’ve won. Ads that people liked were the gold standard. But advertisers didn’t fully accept accountability for delivering a positive return on their clients’ marketing investments. Clients were happy with ads people liked, so why should agencies hold themselves to a higher bar than their clients required?
But a new breed of advertising executive is emerging—one that embraces this higher level of accountability. Awards are still great, but the real measure of success is the value a firm creates for its clients. Still, why would anyone want his or her work scrutinized in this manner? We can think of four very good reasons:
1. It generates new clients. Clients increasingly want to know that the money they invest in advertising is generating a positive return. It’s no wonder they’re drawn to agencies that embrace this concept, as well. Giving customers what they want is a tried-and-true way of increasing revenue across a broad range of industries, and advertising is no exception.
2. It makes the agency’s work better. If an agency doesn’t measure its own performance, the quality of its work is typically assessed by the industry awards it wins and/or whether or not the client’s marketing executives and senior people at the ad firm like it. Advertising professionals are, in effect, breathing their own exhaust. Evaluating work based on the value it creates for the client in the marketplace is a much higher bar indeed—the feedback can be brutal and uncompromising. But when people are held to a higher standard, they often produce better work than even they knew they were capable of delivering.
3. It delivers longer-lasting client relationships. In the advertising industry, client rosters typically ebb and flow. After working with one agency for five to seven years, a client will often determine that it’s time for a change: A fresh set of eyes might see things differently, and the grass is always greener on the other side of the fence. And because its incumbent firm didn’t measure its performance, it’s difficult to know if it was earning its keep. Further, once the new agency is in place, it’s impossible to know if its performance is exceeding or lagging that of its predecessor.
PBM ensures that clients understand just how much value an agency is delivering. If the agency is delivering significant value, it doesn’t matter what the grass looks like on the other side of the fence. Fresh eyes will seem less attractive. If the incumbent is challenged, there’s a clear way to determine which firm delivers the best results. For firms that are providing real value, PBM will result in more stable client relationships.
4. It enables value-based pricing. For agencies that deliver a real return on their clients’ marketing investments, value-based pricing is the Holy Grail. If a firm is simply selling hours, the upside is limited. There’s a cap to what most clients are willing to pay for an hour of work. The ceiling may be $100, $150 or even $200 per hour. But no matter how good the work is, at some point, clients will say it’s too much if they can’t determine the value.
Value-based pricing allows an agency to set a fee for its work that correlates to the return the client expects to receive. With PBM, the client’s focus shifts from the number of hours worked to the value delivered. If an agency delivers $10 million to a company’s bottom line, the client is quite likely to be willing to pay $2 million for the service—paying a fixed fee that the client expects to be 20 percent of the delivered value seems reasonable. And if the agency can deliver $10 million of value while working only 2,000 hours, so be it. They may be making $1,000 per hour, but the client won’t focus on the cost per hour. The focus will be on the fact that the agency delivered value equal to five times its cost.
It’s clear that PBM is beneficial for clients. But it can be equally beneficial for agencies that deliver value that significantly exceeds the cost. Admittedly, agencies that fail to deliver value will find this new world a difficult one in which to survive.
Next Week: A Paradigm Shift