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 Four: A New Paradigm

Value-based pricing is the first step on the road to a new paradigm for agencies. In this new world, instead of charging for hours, agencies would sell revenue. Consider an industry with high margins where a dollar of revenue this year is likely to result in additional revenue in subsequent years. A dollar of revenue in the current year might be sold for 75 cents, a dollar or even more. Instead of charging for its time, an agency would charge a fraction of the lifetime value it creates.

The implications are profound. To be sure, agencies will realize significantly more upside. No longer will their compensation be limited to what seems a reasonable charge for an hour of work. An agency’s compensation could be limited only by the value it delivers to its clients and the share of that value that it seems reasonable for the agency to claim. This will clearly vary by industry.

The other profound change is that the risk has entirely shifted. When an agency is paid for the hours it works, the risk of a campaign performing poorly is borne entirely by the client. If the agency’s work produces upside for the client that exceeds its cost, the client does well. If the agency’s work doesn’t deliver value, the client loses its marketing investment. In either case, the agency gets paid for the work and shares none of the risk. The client bears it all.

On the other hand, if the agency is paid a percentage of the value it delivers, the client incurs no risk. If the agency delivers no value, the client pays nothing. If successful, the agency can and should be compensated handsomely. If unsuccessful, it might be working for free. Since the agency takes on all of the risk in this situation, it’s only fair that it should enjoy significant upside when things go well. Obviously, hybrid solutions in which risk is shared between the agency and the client are possible.

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In short, PBM is gaining traction. It’s good for clients, it’s good for agencies that deliver value, and it will ultimately drive a change in the paradigm for pricing in the advertising industry.

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