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.”
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