Compensation models vary for interactive Marketing services. When they are negotiated, both sides want to shift as much risk as reasonable to the other side. This is why agencies like the commission model. No matter what happens, they get their check. Advertisers like performance models. They only pay for what they get, even if they get less due to factors outside the scope of advertising (I’ve been hit with distribution issues in the CPG industry). Typically, these two meet in the middle.
One such model is at the heart of the online performance marketing industry, specifically "cost per." It may be an action, lead, customer or other quantifiable metric that can be sourced to specific efforts.
At the resent IAB Leadership conference on performance marketing in Chicago there was much discussion on the issue of the most common method: paying the same amount for each like lead (meaning amount of information submitted.) In general the conversation focused on moving to a pay per media source, allowing the cost and value of the source to be evident to the client. So, Instead of being paid $50 per, the client will pay based on the relative cost of the Media. The idea behind this is transparency. If one media cost $25 and the other cost $50 then the agency is paid $30 and $60 respectively with a 20% commission. Or its cost plus. The media cost, plus $5 per lead, not exceed $50 per lead net for example.
Before I get to my perspective, a little background: The company I work for, Leapfrog Online is a customer acquisition company. We do not get paid until our partners get a paying customer. We front the media cost, so if something doesn't work, it comes out of our pocket. We operate a closed loop process of integrating our experience and backend with our partners’ systems in order to control the media and the experience. We track everything to the value of the customer it generated. I bring this up for 2 reasons: 1) like other quality online firms we track EVERYTHING (I think even more so, but that might just be pride talking) and 2) more so than other firms, our financial success depends on the quality of the lead and our ability to optimize the quality by controlling and adjusting the media, messaging and experience based on the lead source (because we don’t get paid until the lead becomes a sale.)
Okay, so what does all this shameless self promotion have to do with the IAB Conference on lead Gen? A lot. The real issue is not the quality of the media source. Rather, it is the ability to optimize during the entire sales process. If a client treats every lead the same, then the cost of the media is the only variable that can be used to equalize per customer value. When this happens, the obvious next step for the compensation discussion is limited to lead source, or media.
If an agency is on cost plus, or percent of spend model, they are protected. Therefore, the client needs to be vigilant in managing the media sources, because the client absorbs all of the risk (caveat – the agency will be fired if the leads are junk). The challenge here is that clients are typically risk averse. According to a February 2007 ARF study, 10% of companies budget $0.00 for new initiatives or higher risk media. Another 74% have 1%-25% set a side (I’m guessing more are closer to 1% than 25%.) I’ll get more into this as an issue a bit later.
If, however we work with an average compensation per lead, or sale, the client is protected and the agency takes the risk. This is good for everyone, if the client and the agency can mutually track back to quality, and optimize accordingly.
Consider the following media based compensation scenario with a client target cost of $50 per unit (lead, sale, trial, whatever counts as a unit):
If we work on a media level compensation, media 2 will not make it beyond the first month (likely not beyond the first week). On the surface, it appears inefficient and the client will pay $28,000 more than they have targeted. This is 1,000 units that will not make it back into the plan.
At this point, I have heard people say, “at that price, it shouldn’t be in the mix.” This is the typical risk-averse perspective. If a client is operating under monthly and quarterly financials, a negative $28k is going to stick out like a sore thumb. On top of that, the agency still gets well compensated even though the units are at a loss.
Now consider the opportunity perspective if the agency has the risk:
In month one, we take a bath on media 2. But, we are the experts. If we control the media, messaging and experience, we can optimize it. By month 2, we lower our losses, and our percentage compensation is good again. However, the real value comes in month three. With the increased efficiency, we can roll new media into the mix and start the process over again.
In the first scenario, we can make more money in month 1. However, we lose opportunity down the line. The client also loses. They give up a potential 1,000 additional units per month and the opportunity to gain quality volume from additional media. Even if we find that media 2 can only support 500 units at an acceptable price, then that is 500 more than we would likely contribute under the first scenario.
At the heart of this are two issues: Control and Trust.
Control over the experience is paramount. Either direct agency control, or significant agency / client partnerships providing the agency with influence and access to the client’s experience. Effective control can not happen without very detailed tracking and analytics. Absent these, all bets are off.
Trust is at the heart of every partnership. Sometimes our reluctance to offer information results less from a lack of trust and has more to do with technical limitations. However, we must have transparency in both directions to make this work. Agencies must know the complete path (online and off line) to customer acquisition in order to truly understand and optimize the customer experience. While I am vehemently against micro managing of the online programs by clients or client service teams, agencies must be willing to open up on where they are placing the advertising and the relative value (easily enough done with proper tracking).
Every partnership is different for various reasons. But, to make the best of it, we need to stop seeing risk as something to be avoided, and start seeing it as something to be optimized.
