Advertising Age published lengthy, laborious content on
outcomes-based remuneration. Hopefully, the reporter is paid by the
word—because if compensation is based on views and website engagement (i.e.,
outcomes), he probably owes money to Ad Age.
Ruminating
on remuneration reflects White holding companies’ impact on the industry.
Fueling the commoditization of Adland—whereby people, places, and practices are
repetitive, redundant, and replaceable—has made most offerings generic. And that’s
just one point in a long list of reasons why outcomes-based remuneration won’t
work across the advertising and media landscape.
Of course, the
discussions have not included non-White
advertising agencies. As such shops are relegated to lesser positions in
the hierarchy—often forced to deliver translated versions or adaptations of mass
market campaign platforms—how might they be identified and rewarded for
positive outcomes?
In short,
non-White advertising agencies can expect outcomes-based crumbs—or
nothing at all.
Agencies want to get paid for outcomes—here’s what’s standing in the way
By Ewan Larkin
As agency
leaders scamper to move away from hourly billing, outcomes-based pricing has
seemingly become all the rage. In reality, rewriting the industry’s
long-standing compensation model is a tricky proposition, complicated by
everything from attribution disputes to the real financial risk agencies and
marketers face.
A June study
from Mediasense found that 85% of agency leaders expect to increase their usage
of outcomes-based pricing over the next two years, and WPP has touted a deal
with Jaguar Land Rover that ties fees to measurable sales and outcomes rather
than hours worked. Dentsu media agency iProspect, meanwhile, is pushing to make
outcomes the center of its reworked operating model.
The shift is being
driven in part by AI and automation, which are reducing the time needed to plan
and execute campaigns, undercutting the logic of a model built around billing
by the hour. But as much as agencies long to do away with the time-and-materials
model, adoption isn’t moving that quickly. For more than half of agencies,
outcome-based arrangements still make up less than 30% of their client
relationships, per the Mediasense report.
The reality is, most
clients—and their procurement teams—are still defaulting to models they know
and understand, dipping their toes in only modestly when they do experiment.
For example, while iProspect is “very open” to putting its “entire fee at risk,”
the agency has no clients on a fully outcomes-based model, executives said in a
June interview.
Below, the core
challenges around outcomes-based pricing and how agencies are attempting to
navigate them.
A definition problem
There appears to be
some confusion around what exactly outcomes-based pricing is, with different
agencies defining it their own way.
What WPP and
iProspect are referring to is a model in which a portion of agency compensation
is tied to pre-agreed media or business outcomes, with clients essentially paying
for performance. In general, if agencies exceed their targets, they can earn
more than their baseline fee; if they fall short, that portion of the fee is
reduced. This isn’t new; agencies have long tied portions of their fees to
outcomes, but many are now trying to increase the percentage.
For other agencies,
what gets labeled an “outcome” is really an output, a fixed fee tied to a
defined scope of deliverables.
“There is absolutely
a definition problem,” said Tracey Shirtcliff, CEO of Scope Better, which helps
professional services businesses manage pricing. When agencies say
“outcomes-based pricing,” what they’re usually landing on, she said, is a
hybrid arrangement, meaning an output-based fee with a performance measure
layered on top.
“I’ve almost never
seen anything that is purely outcomes-based,” Shirtcliff added, describing a
pattern the Mediasense report backs up. Pure outcomes-based remuneration, the
consultancy found, is “exceedingly rare.”
The sphere of influence
WPP’s contract with
JLR, focused on tying fees to measurable sales, appears to be a rarity. Tying
compensation to business outcomes is difficult for any agency, given factors
outside its control, and it’s especially challenging for agencies that only manage
one piece of a client’s marketing, whether that’s creative, media, commerce or
social. (WPP’s remit with JLR is
comprehensive, spanning creative, media, production, customer experience and
strategic counsel.)
As a media-only
performance shop, iProspect is focused on outcomes including lead-quality
metrics in pilots with e-commerce and business-to-business clients, executives
said. Minneapolis independent agency Broadhead has one contract tied to performance, for a
direct-to-consumer client, with 15% of fees at risk based on how many people
the shop can drive to the client’s website, said CEO Dean Broadhead.
The agency—which is
handling the client’s creative and media duties—avoided tying compensation to
sales because it didn’t design the site, Broadhead added.
Working with a DTC
client helps with measurement, Broadhead said, since “you can track the
breadcrumbs a lot easier.” The Mediasense report supports that notion, finding
that retail and e-commerce brands are best positioned for outcomes-based
models, thanks to a high volume of digital transactions, clear conversion
points and few intermediaries between an ad and a sale. Sectors such as
healthcare and automotive, meanwhile, are seen as less suited to the model,
hampered by regulation and longer purchase cycles.
It’s much easier for
media agencies to dabble in outcomes-based pricing, Shirtcliff said, as media
performance is seen as more measurable and less subjective than creative work.
One creative agency
executive, speaking on condition of anonymity, said their shop sometimes
forgoes 10% to 20% of its fee for the first few months of a new client
relationship, money it doesn’t get back if it misses agreed-upon KPIs, such as
lifting brand performance, but which comes back with a bonus if it hits them.
The client tracks the metrics and shares them with the agency, this person
said.
This executive
described taking the risk as more a way to show “skin in the game” against
competing agencies in a close pitch, rather than a genuine embrace of
outcomes-based pricing.
Data and attribution standoffs
Coming to a mutual
agreement on the outcomes is “probably the hardest piece to do,” Shirtcliff
said, “because there’s so many things that can be measured.” Sales and revenue
are the metrics most tied to business outcomes but hardest for agencies to
control, while media metrics are easier to influence but don’t always reflect
the results clients want.
It’s especially
difficult to isolate an agency’s exact role in achieving a business outcome
like sales, which is influenced by factors including pricing. Sixty-nine
percent of agencies surveyed for the Mediasense report said difficulty agreeing
on an attribution methodology was a critical or strong barrier to adoption, and
68% cited insufficient access to client data.
Before signing up
for a percentage-of-revenue deal, Jared Belsky, CEO of independent media agency
Acadia, asks new clients
to share a year’s worth of data to model against—whatever metric the deal is
priced on, whether that’s revenue, margin or something else. Some marketers are
hesitant to share those insights until a contract is signed, creating a “chicken-or-egg
problem,” Belsky said.
“The hard question
isn’t what data do you need to model,” he said. “Sometimes it’s just
availability; you don’t always get it.”
IProspect leans on
its own tools for measurement, including incrementality testing,
experimentation and what executives call a “more modern” approach to marketing
mix modeling. The agency has also built force majeure clauses into its
contracts that extend beyond typical service-delivery provisions to cover
compensation, protecting against unforeseen shocks like tariffs, war or a
pandemic.
There’s a case for
third-party oversight, with a neutral party responsible for measurement, rather
than agencies grading their own homework. But an independent process has its
own drawbacks, too. Measurement approaches like marketing mix modeling and multi-touch
attribution “are too slow,” said Ryan Kangisser, chief strategy officer at
Mediasense, which is why agencies often fall back on proxy metrics instead.
Managing risk
In its
contract with JLR, the majority of WPP’s fees are at risk based on performance,
Ad Age has learned. That’s seemingly a suitable arrangement for JLR, which is
looking to rebuild profitability and cut costs, but how can WPP—working through
a turnaround—afford such risk?
In a June
interview with Campaign, WPP CEO Cindy Rose said the company would not lose
money by focusing on outcomes, explaining there are “ceilings and floors” in
the JLR deal. WPP is also allowed to buy a share of JLR’s media on a principal
basis—a practice in which an agency purchases and resells inventory, often at a
markup—according to a person familiar with the matter.
WPP declined
to comment and JLR did not return requests for comment, but their contract
illustrates a broader reality of outcomes-based pricing models: agencies need
predictable compensation to fund their operating costs. By leaning further into
principal inventory with JLR, WPP is effectively hedging against the risk it is
taking on.
Ultimately,
it “has to be a two-way thing,” said Kangisser. “If the agency is taking risk,
then the client needs to be comfortable that they are going to do whatever they
need to do to deliver against those business outcomes. And so, if it does mean
participating in some of those areas to supplement the fee, then I think that’s
perfectly reasonable.”
Pushback from marketers and procurement
There are risks for
marketers with outcomes-based pricing, too. A company may, for example, have
budgeted $1 million, only to find it owes $1.5 million once an agency clears
its performance targets.
“It’s a variable
cost,” said Broadhead, and clients “don’t love that.”
Procurement teams
apparently don’t either, with 69% of agencies surveyed for the Mediasense
report calling them a critical or strong barrier to adoption. Procurement’s
current approach relies on comparing proposals against legacy full-time
equivalent models, making it hard to prove a cost saving when the two aren’t
directly comparable.
Even when
outcomes-based pricing does make it into the conversation, the report noted, it
often gets “diluted until they fundamentally resemble more traditional fee
structures.”
Success with
outcomes can be a slippery slope, said Wesley ter Haar, chief AI and revenue
officer at S4 Capital’s Monks. If an agency performs really well and gets paid
more, “a procurement team or new leader will come in and go, ‘Hey, this agency
is really expensive. We can get cheaper agencies,’” said ter Haar.
“I had [a client]
who was honest with me. They said, ‘You’re just making too much money, and you
didn’t spot it in advance and tell me,’” Belsky added, recalling a deal from
his time as CEO of Dentsu’s 360i in which 100% of the agency’s fee was tied to
a percentage of a car rental client’s revenue.
Acadia’s founders
have built in caps on how much the agency can earn on performance-based deals,
along with a “reverse tiering” structure, where the shop’s percentage rate
declines as performance climbs higher.
What’s next?
Broadhead is candid
about his limits with outcomes-based pricing and tying compensation to
performance. “For any agency to go much over 20 to 30% would be crazy,” he
said. Of course, agencies’ appetite for risk will depend on various factors,
including how much control they are given over an account, but Broadhead seems
to be onto something.
A hybrid approach,
with inch-by-inch gains rather than a full shift, appears to be the most likely
path forward. WPP’s Rose acknowledged as much while speaking to press last week following the
company’s latest earnings report, saying that widespread adoption of
outcomes-based pricing will “take a few years.”
Mediasense’s
forecast is even less rosy. A full transformation, the report concluded, “still
seems to be in the distant future, if it is to happen at all.”
