Here is a question: how many ways can you pay your advertising agency? No, this is not a joke or a riddle.
Although the advertising industry considers itself a “creative” industry and pays its employees in the same way as labourers and unskilled workers (that is, by the hour), this is a joke.
To discuss this issue and explore the many ways they can be paid, please welcome back to the Managing Marketing Podcast, the commercially savvy, hands-on Finance Director, a CPA with more than two decades of experience managing the finances of media, creative, PR agencies and more, Nick Hand.
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If the media agency, then turned around and said, “We’re not going to charge you a fee, but this is the way we get our money.”
Transcription:
Darren:
Hi, I’m Darren Woolley, founder and CEO of TrinityP3 Marketing Management consultancy and welcome to Managing Marketing. A weekly podcast where we discuss the issues and opportunities facing marketing, media, and advertising with industry thought leaders and practitioners.
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Here’s a question, how many ways are there to pay your advertising agency? No, this is not a joke or a riddle, although the fact that the advertising industry considers itself i.e. “creative industry” and the dominant way they’re paid is still the same as laborers and unskilled workers i.e. by the hour, it is a joke.
To discuss this issue and explore the many ways they can be paid, please welcome back to the Managing Marketing Podcast, the commercially savvy, hands-on finance director, a CPA with more than two decades of experience managing the finances of media, creative, PR, and more, Nick Hand, welcome back, Nick.
Nick:
Hello, Darren. Good to be here again. Good to see you.
Darren:
Look, it is timely that we have this conversation because while the majority of agencies are still being paid on what we call inputs, the hourly rate, the resource plan, increasingly we’re starting to see commissions creep back in on the media side, but largely there hasn’t been a lot of innovation, though there are a couple of green buds you could say that we’ve seen in the past few months with agencies looking at alternatives.
Nick:
Agencies looking at alternatives and also clients prepared to embrace an alternative. I mean, mine and your experiences, we have tried to spruik and something we’ll go in a little bit more detail, I’m sure output based or value pricing. But because the old hourly rates are so easily understood by marketers that seems to still hold sway over the decision making.
But as you say, it’s just a few shoots of marketers thinking differently about how they could pay their agencies. And we’ve got a couple of projects on the go at the moment, tenders that we’re running where the client has said, “Yeah, let’s put in an output-based model what we’ve had for one reason or another isn’t working.” So, slowly but surely, the needle seems to be moving.
Darren:
But beyond value based or output-based pricing models, there is a large range of different ways of paying agencies, many of which don’t even get any consideration by the industry though and it’d be really interesting to explore that with you today.
If you are okay with this, I was thinking I’d love to hear your description or your thoughts on it, but then for me to be the sort of cynical one, because I’ve spent almost 25 years listening to people tell me why they can’t do something new.
Nick:
Unfortunately, that’s the case, isn’t it? Look, I think there are many industries out there that practice one version or another of the list that we’ll discuss and most listeners will be familiar and have come across as a consumer, if nothing else the sorts of models that we’re about to talk about. But yes, you’re right, they don’t seem to gain traction in advertising and for the life of me, I can’t work out why but let’s unpick it.
Darren:
And look, there’s probably just one caveat that we’d put here is that as we talk about different models, it’s really about finding the right model. And sometimes there’s not even the right model that often the best solution is a hybrid that brings two or three or more of these together. So, on that basis, let’s go for it. Give me your first one. Hit me with your best shot, as they say.
Dynamic Pricing – The Uber Model
Nick:
So, the first one is often called dynamic pricing. So, if you’ve ever-
Darren:
Oh, the Uber model.
Nick:
If you’ve ever caught an Uber, you’d be very familiar with that. But also, its predominant model in the airline industry, hotel industry, some hospitality where supply and demand plays a big factor, bigger than most industries in the price of the goods and services at the other end.
And it’s always intrigued me that agencies are quite happy to charge X amount under the old input-based model for whatever it is that they’ve been asked to produce. But if the client says, “Well, actually, we need that turned around really quickly for a media opportunity that we’ve got,” the agencies still charge us the same whether it took them 24 hours or 24 weeks.
And so, there’s potential there and perhaps an easy entryway into something slightly different than just the standard input hours. You could use this model in addition to that more traditional model but you don’t see it very often.
Darren:
And your example is a good one because one of the big issues for our agencies is managing those short turnarounds. But the problem with that, that I’ve always struck is marketers’ expectations of how little time things should take.
I have implemented this as a loading, it wasn’t necessarily a dynamic pricing, or it could have been in one way, in that we got the client to agree with the agency some standard timeline expectations for responding.
Responding to the brief, responding with creative ideas and in market delivery, that anything shorter than that would incur a percentage increase on the fee that was agreed. The thing was that the client constantly had reasons as to why they wanted it shorter, but didn’t want to be hit with what they saw was a penalty.
Nick:
And it’s interesting also because when you’ve got clients that clearly everyone wants to have their budgets go further and try and get more out of the value of the budgets with the agency. But it’s almost a sort of a bell curve or the other way where it starts off really expensive but then if the client gives enough lead time to the agency, then the price comes down but then when you get to those dates really compressed, the price goes back up again.
And managing that sort of arrangement must be horrendous from both the agency and the marketing team to try and make sure, right now we’ve got to brief the agency by this date, because then that will cost that, I can understand why it potentially has not taken.
Darren:
Well, as a young copywriter, I did have a cartoon in my office which said, “Your lack of planning does not constitute my emergency.” And I think, look, that’s part of this, let’s be honest.
Often there’s a lot of work, and we’ve seen it when we’ve looked at benchmarking agency fees, that there are clients who are constantly shortening and shortening deadlines because they take time to get around to it and then expect the agency to jump and when the agency does jump, there is no consequence for that lack of planning.
So, look, I think there’s some merit in it. I just always see the pushback from clients unwilling to take what they see as a financial penalty. So, what’s your next one?
Outcomes based model – payment on results
Nick:
So, outcomes based. So, the agency is paid solely or predominantly based on the commercial outcomes achieved by the client. So, this is different to a performance-based bonus where you may have a small percentage of additional fees that the agency could earn for certain KPIs, achievements, certain KPIs.
This is where the entire fee, or most of it, is based on the commercial outcomes of the client. So, potentially a fee per unit sold, a percentage of sales, a percentage of revenue, percentage of profits, percentage of growth. I’ve seen all of these models put forth at one point in time but rarely find that they work but that’s not to say they couldn’t under the right circumstances.
Darren:
Well, look, and we did implement one that was quite successful for 12 months. It was a business that sold either online or inbound call centers so they knew exactly where the sales were coming from and we moved the media agency from commission to a payment for each sale.
And what we’ve done is worked out approximately over the past 12 months what the cost per sale was from a media perspective, and then what component of that under the commission was the agency’s revenue, and then worked out an amount after optimization because the media agency was not optimizing at all, they were just spending the media budget.
It was interesting because in the first six months after we put this in place, sales went up 250%. 250% and the only feedback I had from the client is, “Yes, but look how much I’m paying my media agency.” Yes, but you are making 250% more.
Nick:
I know it’s a bit narrow sided, isn’t it? I can remember working in an agency years ago, I was the CFO and we want a car client, and we were negotiating the fee, as you always do. And our CEO, who was quite bright, said, “Look, I think we’d reached a bit of an impasse in the usual hourly rates and the number of hours that people were spending.”
And our CEO said, “Look, why don’t we forget all that and you just pay us X amount (I can’t remember what the number was) for every car that you sell.” And I thought, “That’s brilliant. Wish I thought of that.”
I was a young financial professional at the time, someone smarter than me came up with that idea, but the client absolutely looked horrified and said, “Well, we can’t possibly do that for the reason that you’ve just cited. What if we sell more cars than we’ve budgeted? We’ll be paying you significantly more than what our advertising budgets allow.”
So, the problem here is that too many companies keep the advertising budget as an expense line item, rather than thinking, “Well, maybe it could be a cost of goods sold line item and variable with the amount of units that you sell.”
So, that idea got scuppered pretty quickly but I thought that was no other fee, just you pay us a set amount for every car that we sell and the CEO was prepared to put his reputation and his business on the line for that sort of creative thinking.
Darren:
And that’s where all of these performance, true business performance-based models suffer from three main problems. The first one’s the one you’ve just identified, how do I budget within the constraints of a marketing budget to pay for performance? It has to be a variable cost of goods sold.
The second one is, how do I actually attribute the performance? Because the number of times I’ve seen this fall to bits is when it’s gone particularly well, the client owes significant amount of money, and they’ll find some excuse, “Oh, it wasn’t your contribution anyway, so we’re not going to pay it.”
And the third one is that often the business doesn’t realize that when they do this, it’s going to fundamentally change the motivation of the agency because it will become very short term. If you’re paying the agency on sales particularly, they’re only going to look at how to maximize sales in the short term.
Now, for some businesses, that’s great, but you also need to have a component that’s looking at creating customers in the long term. Alright, what’s your next one?
Pay per use – click of the ticket
Nick:
So, we’ve done dynamic pricing outcomes, the next one is usage. So, the agency gets a fee every time the client runs an ad or uses a product that the agency has produced. We see this quite often in technology where every time someone clicks on a website button, someone gets a clip of the ticket at some point. So, this one is very, very rare. I’ve never seen this actually be implemented successfully. What’s your experience with this one, Darren?
Darren:
So, I haven’t seen it done with advertising per se, but I have seen it done where the agency came up with a idea that would help generate sales. And so, what they did was that they said, “Look, we’ve invested in building this technology.” The client didn’t do it. They took it to the client as a going concern. The client bought the idea, but they said, “We will help you implement it, but we want a clip of the ticket for each one that you get sold.”
Again, the problem was that if it was hugely successful, the client didn’t have access to funding on how to actually fund the payment back to the agency. The other good thing from the agency’s point of view is that they saw it also as a license arrangement that it wasn’t exclusive.
Now, the big obstacle is always that the current contracts say that everything the agency produces under that contract, the IP resides with the client. And that’s where whenever we get into discussions about either licensing IP or licensing idea to clients, you are asking them to give up something that they’ve already got and for what reason, to potentially put them at risk of having to pay more if it’s successful.
But I think it’s certainly if the agency’s invested in doing it outside of that client contract, then they could certainly go to them with a commercial arrangement, like a licensing fee or a pay per click or clip of the ticket.
Licencing fees
Nick:
Well, licensing fee is the next one on the list. So, this would differ slightly from the last example in that it’s not a fee every time something’s sold or every time something gets used. But generally, the licensing arrangement is based around a period of use for a period of time or use for a particular geography.
And I think it only works in instances where the agency is prepared to heavily discount the upfront fee. Your example where the client, “Why would I give up what I already own?” Well, what you could be giving up is paying less for the initial idea and then paying residuals as the geography increase or as the time periods increase. That’s the only way that I’ve seen this work but then the agencies-
Darren:
Have you seen it work?
Nick:
I have seen it work.
Darren:
Okay. Because I haven’t, I’ve seen the opposite. I’ve seen where it’s failed miserably. And here’s the reason why, is that, yes, the agency or the creator discounted the fee upfront, but the mistake that both parties made was that they didn’t cap the potential value of that IP over time or build into the agreement when there was a buyout.
Because at some point the client may turn around and go, “You know what, this has been hugely successful and we’re going to continue with it, but we want to pay you to buy it out and we’ll take it on so it doesn’t keep going.” And both of those are important considerations in this model.
One is capping the amount and using that cap as a trigger to then potentially buy the IP from the agency. The reason being is, in this particular case, eight years down the track and significant media investment in the idea by the client had now made it a multimillion-dollar asset that someone was sitting there going, “Well, we’ll just keep paying the licensing fee for as long as you use it,” to the point that the client’s going, “We are trapped.”
And that’s a terrible position to be in commercially, is feeling you are being trapped by an agreement with your supplier.
Nick:
Yep. The instance where I have seen at work, those issues were addressed. So, it was a small “startup business” that didn’t have a lot of money. So, we came up with this idea, well, you pay us, I think it was 30% of what we would ordinarily charge for the idea and for this particular set of communication outputs, but you need to pay us the same amount or something similar again in six months’ time and then six months past that.
I think it was capped at 24 months eventually, and we knew that if this business was successful, we would end up with 25 to 30% more of that same period of time in fees that we otherwise would’ve earned if the business wasn’t successful, then it was going to shut down the ownership of that IP would’ve reverted to us, and we could potentially have used it again in another instance.
Darren:
And that’s it. You would rarely see this as a long-term relationship. What’s your next one?
Subscription fees – the Netflix model
Nick:
So, subscriptions. So, this is one that I’ve seen tried, but not successfully again. So, the client pays a fee usually for a particular service that is repeatable and recurring. So, for example managing social media channels, an agency that is just moderating a company’s owned social media channels.
Now, this differs from a retainer in that it’s not based on inputs. So, you’re not paying by head hours, you simply agree a fee for the moderation, whether it be for 24 hours or whether it be between particular hours in the example of the social media monitoring and the agency will have to accept that fee regardless of how much work is involved.
Now, there may be fellow periods where they’re not doing anything but then if the client has particular events that prompts a spike in their social media activity, then the agency’s potentially working around the clock to try and keep up with moderating all of that.
So, the reason for doing it is it takes away a lot of the admin of managing a retainer, accounting the hours, reconciling the hours, agreeing what the hours should look like and it’s just simply, well, agency, here’s amount of money to do that particular service-
Darren:
Pay it on a regular basis, like-
Nick:
You go off and manage it.
Darren:
And look, in some ways this is a retained value-based model in a way, because what you’re saying is we are agreeing the outputs, typically you’ll be doing these types of things in some months you might be doing it five times in other months, it might be three times but rather than paying that, we’re paying the same amount over a year, and it swings and roundabouts.
And look, it does work on rather simple expressions of outputs like that, like ongoing social media or community management and things like that. It doesn’t work where you’ve got incredibly variable or complex deliverables because the swings and roundabouts become too great and that has an impact on the agency in the cost of delivering those that they can’t absorb on the swing and roundabout.
Nick:
And quite often I think these things also fall down and this is quite true for any model really, but in this instance where the client hasn’t necessarily properly scoped out what they want the agency to do, and the agency finds they end up doing much more than what they initially thought they were going to be doing and run into the same problem that you’ve decided.
You mentioned before the incidents of commissions and service fees coming back into Vogue. Why do you think that is? Particularly on the media side?
Darren:
I think because we’re seeing an increase in agencies generating revenue from the media owner side, either by kickbacks or inventory, credits or whatever that agencies are finding that an easier way to justify fees and so, what we’ve seen is, and let’s call it a disclosed and a nondisclosed fee model.
So, a disclosed fee model is one where the media agency is very transparent and says, “This is where we’re making our revenue.” Now, that could still be commissions but they disclose those commissions so that the client is absolutely aware of what is the revenue of the total spend.
And then there’s non-disclosed, and I think that’s probably the area that’s the most dangerous for long-term relationships, because there’s always then a question mark of how much the agency’s making. But almost all of those work on some sort of commission service fee rebate that’s a percentage of spend.
The hybrid model – custom built
Nick:
And then of course, the last one on my list, and you may have a couple on yours, is hybrid arrangements. So, some combination, some permutation of each of those things in various forms. The most common that we see is you have a small retainer potentially often based on head hours just for day-to-day relationship management.
And then you’re paying for campaign work. It’s particularly applicable to a creative agency by projects sometimes again, FTE or head hour based, but also sometimes output or value based and I think we’re seeing a little bit more of a rise in those sorts of arrangements as well.
Project fees have sort of been taking up more and more of the accepted models over the last 5, 10 years, I suppose. But even now, more so, I think we’re seeing that those sorts of hybrid arrangements work better for advertisers better able to manage their budgets, particularly if they’ve got a roster of agencies.
Darren:
And the only thing I’d observe about the rise of the hybrid models Nick, is where that leads to a level of complexity that then confuses either one or both parties. And what I mean by that is where we’ve seen commission for certain part, hourly rates for another part a retainer or a sort of monthly fee for something else.
And always that sense of is there duplication, is there overlap between these various payments? It becomes really interesting because I think one of the things that holds the industry back in hourly rates is no matter what, it’s quite simple, I’m paying you by the hour. I’m paying for you to supply a certain number of people by the hour to do the work that I need.
And so, that’s something tangible that people can contemplate and think about. Where it becomes problematic is where you’re sitting there with an Excel spreadsheet of hours and asking yourself, “Does it really take so many hours to do the work?”
And I think, certainly hybrid is a nuanced approach, but the thing … and we saw an agency recently came in with quite a complex three-tiered offering of performance, licensing or licensing ideas over the period of the contract or hourly rates.
And even for us that have spent 20 odd years working or more working with agency finances, it was incredibly complex to sort of work your way through on how that would work because it lacked detail and it lacked any examples of real application. It was sort of the typical pie in the sky. You could do this or this or this, which you couldn’t make a decision on because there was no way of knowing where you would net out as a client or as the agency.
Nick:
I mean I suggest that this probably wasn’t their motivation, but if we have enough misdirection over here and confuse people, then maybe we can charge what we want. I don’t know.
Consideration for implementing new fee models
Darren:
Well, that or also wanting to be seen and as per my introduction, wanting to be seen to be innovative, even down to the way they were paid. But the danger is there’s innovation and then there’s a commercial proposal and coming up with an idea that’s sort of half thought through is not really a commercial proposal.
I think you need to sit down and that’s why I’m not sure pitches are the time to necessarily drive drastic change. I think that if a client and an agency enter into say, a three-year agreement, or with renewals, that they also enter into an agreement to explore and implement alternatives during that period.
Because it does take a huge level of trust on both parties that they’re not going to fundamentally end up worse off than they are under an existing model. And during a pitch process, that’s not necessarily the best time to be having that conversation.
Nick:
No. And not just the trust aspect, but generally the agency and the advertiser don’t know each other well enough to be able to have those conversations, don’t know the nuances of working together that may have to drive some of those pricing decisions that they make.
Darren:
It’s a bit like trying to implement a prenup just before you marry the person of your dreams but trust me, it’ll all work out the end. Look, there is one area that I’m really interested in, in exploring a bit deeper, and you touched on it, which is performance-based models.
Now, PBR performance-based remuneration, or payment by results has been around for as long as I’ve been doing this. It’s taken many shapes and forms. The one that has been probably the most common is where you come up with some different parameters such as agency relationship scores, maybe some marketing metrics, sometimes some sales metrics.
And that goes into our matrix which depending on whether it goes up or down, gives a certain percentage as a bonus to be paid. It’s invariably framed as a carrot and a stick, because invariably it takes away a percentage of the agency’s base fee for them to win that. You’ve seen these models, haven’t you?
Darren:
Yep.
Nick:
The trouble I have with them is that they’re really disincentives because the upside is never really compensating for the downside.
Nick:
No, no, it’s not. And you see instances and did a review 12 months ago where the bonus was 5%. Now 5% could be a large number if the base is large, but in this instance it wasn’t. And I happen to know that the agency would rather spend going over and above, which is generally what you need to do as an agency to be paid these bonuses. They’d rather go over and above on new business where the upside, the win is a lot higher than the 5% that they could have earned on this particular PBR scheme.
Now, the agency didn’t phone it in, they did what they required to do by the contract, and the advertiser got pretty good result, but had the bonus been 20% at 25% then the agency’s more incentivized to go that extra mile to deliver the KPIs that would get them that bonus.
And now all of a sudden, it’s always much easier to get additional income out of an existing customer than it is a new customer, find a new customer and we know that it, but the way that most of these PBRs are structured, it doesn’t provide that incentive for the agency. And the usual complaint is from the advertiser. “Well, I just don’t have the budget to pay potential 25% bonus or 20% bonus, five percent’s, all I can justify.”
Darren:
And that’s because it’s coming from a budget, not from cost of goods or a variable source of revenue. The other problem is the complexity of a lot of these. I remember being called in to look at one and I saw the complexity because there was huge amount of data going into it. And I was asking around the cost of sourcing that data because they were using, I think it was Nielsen warehouse extractions and all sorts of proprietary research data.
And I asked about what they were paying for it, the actual cost of collecting that data and analyzing it was over 12 times the actual value of the bonus that was sitting on the table. So, the cost of doing it was much greater than the actual bonus.
Nick:
My favorite story, sorry to interrupt. My favorite story was I asked the client, a long relationship with an agency, “Has this bonus ever been paid out?” And the client had to say, “Well, no, it hasn’t, the guy that developed the spreadsheet that calculates it left the business, and no one can understand how it works.”
Darren:
I have heard that as well. Though, on the flip side, the one that I liked was a procurement person said to me, “Is it normal Darren for the media agency to get a hundred percent of their bonus every year?” And I said, “Well, that really depends.” “Who sets the targets?” “Oh, the agency does,” or “Who measures the targets?” “Well, the agency does.” “And who validates the measures?” And they said, “Oh, I can see why they got a hundred percent of their bonus.”
So, it’s interesting, but for me, that’s old school because it’s not really paying the agency for performance, it’s paying them for often doing a good job. And that really hit home in 2010, ‘11, when a lot of clients that had these deals in place were coming and saying we’re trying to explain to the CFO why in the midst of a global downturn, we’re still paying a significant bonus to our agency because they were getting good scores for relationships.
The brands were still tracking along well, and so they were up on their bonus, even though that the organization had contracted in size. And so, the CFO’s going, “Why are we paying more to suppliers when our business is not growing?”
Nick:
Sometimes I think agencies often look warm on these PBRs because particularly there’s an at-risk component, which means they could lose income. And quite often for all the reasons that we’ve cited, actually getting a bonus that’s relative to the effort they would need to put forth is quite difficult.
But agencies often accept it because they know that … or there is a clause in the contract that the price that’s been agreed for all the other services, the retainer or their head hours or whatever it may be, is fixed for the term of the contract.
So, they’re not going to get an uplift in revenue even though cost of doing business inflation might increase. So, they go into these PBRs as a way of potentially getting additional revenue.
It may be much easier for clients to commit to reviewing the agency’s remuneration every year and increasing it, if not in line with inflation by some other factor that actually acknowledges that cost of business is always going up and agencies potentially need to pay their people more.
And rather than going through the convoluted process of trying to put together these bonus structures, which aren’t necessarily much of an incentive anyway as we just talked about.
Darren:
So, then we’ve got, for a while there, there were attribution models, there were all these companies out there working out how to attribute marketing performance and growth to particular activities. But that’s gone even one step further now.
We’ve got these MMM, marketing mix models that are being used by clients absorbing huge amounts of data in real time or on a regular basis and helping them using AI to identify patterns and make decision recommendations.
So, that in some ways we’re getting closer, and I know there’s a lot of question marks still from some people how accurate or valid these are, but we are getting closer to the point where individual agency contributions can be seen to actually create or contribute to growth.
So, that makes an interesting thought around ultimately where performance would get to. And while I don’t necessarily see a world where agencies would get paid purely on performance, I think there is a model that sees them getting paid for the value of the work, but then paid a bonus where the particular activity performs beyond the projected campaign performance.
Nick:
I think that that’s probably the next iteration of that PBR model where it’s less subjective as they currently are structured and is looking at hard data that has potentially been validated or as close as possible to being able to apportion the agency’s involvement in the commercial success of the business. I think that’s got to be the next iteration of that.
Darren:
It’ll be interesting to see if that’s where it works, because I like the idea if a algorithm is saying, based on the data that this activity should generate these types of sales, and it does, that’s the work that it’s doing, then obviously whatever the agency adds to that to perform better than the projection on the algorithm has to be a performance bonus.
Nick:
Look, and I think you said this as you were introducing it, the key is the agency being paid based on the value that the advertiser places on the services, on the work that’s being done, which points more to an output-based model to start with is the base.
Let’s get making sure that the agency’s paid a fair fee based on how much the client values that work, and then if you are able to narrow down the attribution with these MMM models, then pay the agency for their contribution to the stretch success of the work that they produce.
Darren:
See, I’m not sure that the MMM models actually can break it down to what was the contribution of the media and the creative because what it’s really projecting is what would be the best media selection investment.
The creative is in most of them still unknown so that becomes the interesting delta. If it’s great creative that drives a better result than expected, then it’s an improvement on the norm. And so, I like it from the perspective, Nick, it touches my science background.
It’s like, okay, if I’m doing an experiment and my hypothesis is I should reach a certain point here on this level of investment in these channels, and I get a higher performance, then clearly there’s a factor in there that is unaccounted for that’s having an impact.
Nick:
I guess it’ll be interesting to see how these models evolve and whether the contribution of creative is able to be isolated in the future.
Darren:
Yeah, absolutely. Well, there was an article recently where looking at the studies of Effie Awards, they show how creative is still the unknown factor that drives performance. And going back to awareness, the higher the awareness driven in any activity, then the increased multiplier on return on advertising investment or return on investment is seen both in the short and medium term. So, it’s an interesting area.
I want to flip this around to something that’s almost the opposite. The opposite of performance is also the rising number of media agencies, and I touched on this earlier, in the undisclosed world of agency fees, in a world where procurement talk about working and non-working, being working, is the money spent on media and non-working is the money spent on the agency? What would you say to a client when the media agency walks into a pitch and says, “We’ll spend your media budget and there be no fee to you because it is already happening.”
Nick:
I mean, if I was a client, I would be concerned about objectivity. I would still want to know, well, what fee are you earning for this? Now, it may well be that it’s an exorbitant margin because you are bearing the risk of buying the inventory or whatever the case may be and that’s fine. Well, it may be fine. The client may decide that that’s money well spent if the results are as required. But I would still want to know, well, what’s the margin that you are making.
But the objectivity is the first thing that jumps out at me. How do I know that the right channels are being chosen and bought, the right ads are going into the right channels, explain to me how that works. Is the first thing that I’d want to know.
Darren:
So, if the media agency, then turned around and said, “We’re not going to charge you a fee, but this is the way we get our money,” and they’re completely transparent about it, you would say that that’s probably better or more acceptable than the one that says, you leave that up to us.
Nick:
I think, you mentioned before that sometimes these models that we talked about earlier are better implemented once there’s an existing relationship, not at a pitch stage, and it all comes down to the trust. And the opaque, well, you don’t worry about it, we’ll manage all that. You just leave it up to us doesn’t engender a lot of trust in my view.
Now some clients, they may be completely fine with that, but I think it is much more acceptable for the numbers, however confronting they may be to be laid out so that the client’s they’ve got information on which they can make a choice.
Darren:
Because here’s my fear. Three media agencies all sitting there, one has gone with a commission, disclosed commission, one is going with a typical resource retainer, and the third one says, no fees.
Now, unless you know that the other two are not going to be doing the same thing, you could end up paying a retainer or a commission, and they’re doing the same sort of behavior as the third one and adding to their revenue and their profit margin at your expense. And I think this is why, no matter how the media agencies want to spin this, if that’s the fee game they want to play, then part of that has to be transparency.
Nick:
Yes, I agree. I think in each of those instances, the transparent fees as you call it and what’s your principle-based model or what other revenue streams are you earning from technology and those sorts of areas, I think it needs to be spelled out so clients can make a choice.
Darren:
I can see why they don’t want to, because that immediately sets up procurement, who on one hand would love zero non-working expenditure by no media fee, agency fees. But on the other hand, they would then immediately look at a transparent sources of revenue and start trying to nitpick at where they could squeeze those margins, wouldn’t they?
Nick:
Well, they would, I’m just wondering though, if it’s once upon a time when there were big legacy publishers that were the only options and the local agencies would do deals with those publishers to improve their rates, you could have more of an argument in comparing two or three media agencies together.
Agency A has got better rates than agency B who’s got better rates in agency C, but that’s no longer the case anymore but that’s no longer the case anymore because the digital platforms are all charging everyone the same amount of money to a point.
Now I understand that you can buy the inventory in bulk and that reduces the cost, I understand all that. But again, if the agency’s taking on the risk it needs to be looked at. What the procurement person needs to do is they need to look at it on like-for-like basis.
Darren:
Well, and most procurement people have forced this by turning media agencies, not into agents but into principle contractors that wear the risk anyway. So, it’s their own definition of the relationship that has opened the door to this.
Nick:
Ultimately though, doesn’t it come down to the results that the advertiser is getting?
Darren:
You’d hope so.
Nick:
I mean, if agency B is cheaper than agency A, but the results aren’t there, then the money you’ve paid agency B, even though it’s less is potentially money wasted because you haven’t got the results that you would’ve got with agency A by potentially paying a little bit more. I mean how often does the value equation get closed in that scenario, not very often, I’d say.
Darren:
Well, look, Nick, it’s been a great conversation. Can you take us through your list again of the alternatives to the old retainer head hours.
Nick:
I can, so there’s output or value based which we touched on a little bit, the dynamic pricing.
Darren:
I like that one.
Nick:
I think adding some sort of a loading, it also keeps clients honest to make sure that they are encouraged with the right behaviors. Outcomes based, so what are the commercial outcomes achieved by the client? Fee per unit sold, percentage of sales, percent of revenue, all those sorts of things.
The usage, so the ticket gets clipped every time the agency, the client uses a product or an ad that the agency produces. Subscription for some of those recurring and repeatable services that are relatively easy to be scoped.
And then license fees where you may pay a little bit less upfront, let’s say for a strategy or a concept, but then you’ll pay additional fees the longer that campaign runs, or potentially for different geographies that it may get rolled out into, ideally with some sort of buyout clause at the end of it.
Darren:
And look some of these are included where there’s a list of 11 different remuneration or agency fee models on our website under the agency fee decision tree that people can have a look at. It takes you step by step through the considerations and leads you to one of 11 different fee models.
So, probably worthwhile for anyone interested in what’s available to have a look at that. But Nick, thanks for your time. I always enjoy our conversations.
Nick:
Yeah, me too. Thank you.
Darren:
But if were personally running an agency today, what model would you be using?