Ignition Consulting Group Founder Tim Williams reveals how some North American agencies are transforming their approach to compensation using fixed, variable and dynamic price models. This presentation was shown at the IPA's Performance Adaptathon in London on 8th July 2014. Find out more at www.ipa.co.uk/adapt/performance and get involved in the conversation on Twitter #ipadapt.
Tim Williams on how North American agencies are transforming their approach to compensation
1. HOW SOME NORTH AMERICAN AGENCIES
ARE TRANSFORMING THEIR APPROACH
TO COMPENSATION
Presented by Tim Williams
ignition consulting group
www.ignitiongroup.com
twilliams@ignitiongroup.com
@TimWilliamsICG
2. CLIENT: I want to hire you for your expertise and your ability to create and
execute transformational business ideas for my company.
AGENCY: Excellent, we are ideal for that challenge.
CLIENT: Yes, but before I hire you I have a few important questions.
AGENCY: Okay, shoot. What do you mean?
CLIENT: What will you charge me?
AGENCY: $1 million dollars for our ability to work with your organization to create the
idea, and then if we move it forward another million because truly transformational
business ideas are valuable and in limited supply.
CLIENT: Why $1 million?
AGENCY: What do you mean?
Jason DeLand
Partner, Anomaly
3. CLIENT: Well if I understand how you arrived at it, then I can negotiate it down.
AGENCY: But I don’t want you to negotiate it down. That is money out of my pocket.
CLIENT: Yes, but it’s a privilege to work on my brand and you’ll get lots more
business from it.
AGENCY: I will? Can you guarantee that?
CLIENT: No. But I still need to know how you got to your price.
AGENCY: Well, OK...I looked at the size and scope of the opportunity and considered the
value of us addressing it for you and calculated a price that I am willing to do it for. A price
that I believe to be competitive in the market and a price that affords me the peace of mind
that I can make a bit of money.
CLIENT: Oh, but I need more than that. I need to know who will do the work... and the
amount of time it takes for them to do it.
AGENCY: The team I said will do the work...and it will take as long as it takes until we have
an outcome that everyone is happy with.
CLIENT: Yes...but what if just one person cracks it in one day...and you then execute
it with a small team in three weeks – that is not worth a million dollars.
AGENCY: You’re 100% correct. It’s worth more.... If that happens, we will double it!
4. Three basic value pricing approaches
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A dynamic price based on usage.
5. 1. A fixed price based on perceived value
What is the customer
willing to pay?
11. Three basic value pricing approaches
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A dynamic price based on usage.
12. How can we get paid in a
way that aligns the
economic incentives of our
two companies?
2. A variable price based on outcomes
26. Three basic value pricing approaches
① A fixed price based on perceived value.
② A variable price based on outcomes.
③ A dynamic price based on usage.
27. 3. A dynamic price based on usage.
How can we get paid
for the use of this idea
rather than just
the production?
28. “Advertising is not a service
business. We’re a product
business, like publishing and other
businesses that deal with
intellectual property.”
Jeff Hicks
Vice Chairman, Crispin Porter + Bogusky
If you analyze the value propositions of most professional service firms, you’ll find they are based mostly on widely available overdeveloped services; they are placing themselves on the wrong side of the value chain. By focusing on the underdeveloped services in your industry – largely unsatisfied client needs -- you are in effect positioning the brand not just for where the profits are, but for where the profits will be.
If you analyze the value propositions of most professional service firms, you’ll find they are based mostly on widely available overdeveloped services; they are placing themselves on the wrong side of the value chain. By focusing on the underdeveloped services in your industry – largely unsatisfied client needs -- you are in effect positioning the brand not just for where the profits are, but for where the profits will be.
*In order to change what we care about, we must change what we measure.
*If we measure just what’s easy, we’ll maximize what’s easy.
Chicago-based B2B agency 5MetaCom trades the hourly rate concept for a fixed price approach. In other words, instead of charging for time spent, they charge for services delivered. What’s the rule of thumb in setting a fixed price? This may sound simplistic, but the answer is “whatever the market will bear.” When a restaurant puts “market price” for an item on a menu, this is essentially what they’re doing.
One progressive firm makes this a common practice by serving up options that have different names, different metrics of success, and of course different prices. This is an effective approach because, once again, it shifts the discussion away from “How much time will this take?” to “Which of these options would work best for you.”
And by the way, according to the principles of pricing psychology, guess which option clients will pick 87% of the time? That’s right, the middle one!
*In order to change what we care about, we must change what we measure.
*If we measure just what’s easy, we’ll maximize what’s easy.
*For major food clients like Heinz and Del Monte, Pittsburgh-based Smith Brothers has outcome-based performance agreements that have resulted in 30% profit margins for this agency, even during the recession.
“Today, half of Mediabrands agencies are on pay-for-performance contracts, which tie compensation to business results.” (Adweek January 20, 2014)
At the media agency Universal McCann, half of the firm’s clients are engaged in some form of compensation arrangement where between 25% and 75% each media buying contract is earned through outcome-based compensation.
P&G has long believed in paying its agencies based on marketplace value instead of internal costs, their highly effective Brand Agency Leader model is based on writing one check to one lead agency, who then hires and pays other specialist agencies.
*The check that P&G writes isn’t based on labor hours or hourly rates; P&G doesn’t believe they’re buying time. Instead, it’s based on outcomes.
On many major brands, Kimberly-Clark now pays multiple agencies based on shared KPIs, which ensures collaboration and alignment of economic incentives.
In addition to simple metrics like the ones just shown, you can also select and weight several key metrics …
* … as in this example for a global bank, which pays its agency based on a combination of business, marketing, and customer measurements.
A firm representing a major bluetooth headset brand is compensated based on a royalty on sales.
The agency for a major luxury car brand earns $50 for every car sold in North America.
The agency for a major liquor brand receives $2 for every case sold in the U.S.
Vancouver-based Rethink, an agency with a reputation for innovation, does this with their “Rethink Rebate,” which they’ve had in place for well over a decade now.
*In order to change what we care about, we must change what we measure.
*If we measure just what’s easy, we’ll maximize what’s easy.
Crispin’s Jeff Hicks once said (READ)
Southern California’s Palio+Ignite creates their own infotainment properties, such as a video game to help kids with juvenile diabetes learn how to use their insulin pump. The agency owns the IP and licenses it to their pharma clients.
Healthcare specialist CMI created a proprietary database platform called “By Doctor” that is the agency’s property, licensed to clients.
Rockfish – one of Advertising Age’s “Small Agencies of the Year” created their own product called Coupon Factory, which allows marketers to create their own digital coupons.
An agency I know in the midwest charges its mostly B2B clients not by the hour, but per qualified lead. Pretty smart.
In California an agency that does a lot of work building e-commerce websites charges not by the hour, but rather asks for a percent of first-year sales.
Here’s what I mean. Think for a moment about your the way you personally invest your money -- your financial portfolio. If you have a good financial advisor, your portfolio is diversified; it balances risk against reward, and has a number of different levels of risk built into it.
The agencies that are innovating when it comes to compensation bring a similar philosophy to their compensation portfolio. *Some agreements are low-risk low-reward, *some are medium-risk, medium-reward, and *some are high-risk high-reward. But overall -- just like a good personal financial portfolio -- the return is higher than if it were just a single way of getting paid. I can tell you that the agencies who approach their compensation agreements in a diversified way earn much higher margins than the industry average.