Why Advertisers Want Value-Based Agency Compensation

With our thanks to Tim Williams from Ignition Consulting Group for this article

It surprises most agency professionals to learn that many advertisers are intensely interested in exploring a value-based compensation arrangement with their agencies.  A recent position paper from the Association of National Advertisers (ANA) states it clearly:  “Traditional metrics used in today’s cost-plus compensation agreements (usually based on time) have no relationship with the external value created for the client in today’s intellectual capital economy.  Therefore, pricing should instead be based on results and value created."

In our recent work with the ANA, Ignition has discovered that marketing, finance, and even procurement officials from client companies are actively engaged in internal discussions around value-based compensation.  Our view is that if the agency community isn’t more proactive in this area, clients will be the driving force behind a change in compensation practices.

Buying outcomes instead of hours

From a marketer’s perspective, the chief frustration with the traditional cost-based compensation system is that they’re not sure what they’re really buying.  Are they buying the agency’s time?  Dedicated staff? A set amount of work?  In the end, they don’t really want to buy any of these things; they want to buy results.

In a cost-based compensation arrangement, the marketer pays for efforts rather than results.  Agencies log and charge hours regardless of the outcomes the hours produce.  In a value-based arrangement, agencies and clients identify specific metrics of success and structure agency compensation around outputs instead of inputs.

Shared interests, shared risks and rewards

Value-based compensation works primarily for one major reason:  it aligns the interests of the agency and the client.  Both parties are working to achieve the same things.  They both have similar financial incentives.  Structured properly, value-based compensation agreements can also give both parties similar risks and rewards. 

Imagine how this could change the dynamics of an agency-client relationship.  Suddenly, the concept of “partnership” takes on real meaning.  Marketers start to view “risky” agency recommendations differently, because they know the agency has skin in the game.  A new level of trust and mutual respect emerges, because both parties have a stake in the outcome.

Value-based pricing is unquestionably where the marketing world is headed.  The question is, who will get there first: agencies or their clients?

Tim Williams is founder of Ignition (www.ignitiongroup.com), a consultancy devoted to helping agencies work in a value-based way with their clients.  He welcomes your comments attwilliams@ignitiongroup.com.