It is interesting that according to the ANA the most common agency compensation model is still the resource retainer approach. Even with an increased number of advertisers talking about moving away from it, it appears that the retainer model is holding its ground, most likely due to convenience and ease of management.
But there are an increasing number of different agency compensation models as well as a large number of hybrid models too.
Having worked with agency remuneration for more than 15 years, we have experience with all of the common models and have even created some innovative hybrid models aligned to the needs of the advertiser.
The fact is, there is no longer a standard agency remuneration model or even a best practice model that can be applied across every advertiser. But we have found there are some specific criteria that allow you to decide which models or hybrid models are the best fit.
The remuneration criteria
Here are the questions you need to consider when choosing or developing an agency remuneration model:
- Are the services you are paying for campaign or output based or always on?
- Is your scope of work predictable or highly variable and unpredictable?
- Are the agency outputs specific and definable or undefined?
- Is your scope of work high volume or moderate to low volume?
- Are you managing one brand or a house of brands or products of various commercial value?
- Is the agency work seasonal or all year round?
- Does the agency contribution make a measurable contribution to achieving either marketing or business metrics?
Lets explore each of these and see how they influence the type of agency remuneration model or hybrid compensation model.
Output versus Always On
Traditional marketing plans would include campaigns of activity with specific deliverables required of the agency for both advertising and media agencies. But in the always on digital world with programmatic buying and social media monitoring and responses the agency is required to provide on-going resources by the hour, day or week.
If you have specific requirements or deliverables you can use value-based models that value those outputs but where you are effectively retaining resources to monitor or respond on a time basis, then hourly, daily or weekly rates can add up to retained remuneration based on the time required.
Predictable versus Variable
Some marketers are able to carefully plan their marketing requirements over the year. This is particularly true of consumer goods marketers. This means you can closely align the agency resources to the specific outputs to be delivered by the agency and makes it an ideal situation for a retainer model.
If you retain agency resources without providing a specific and predictable scope of work you could end up over utilising or under utilising the agency retained resources.
On the other hand in some competitive or dynamic categories and markets, the requirements of the marketing plan and therefore the agency scope of work can change unpredictably.
In this case a marketer needs a more flexible remuneration model such as project fees. But with some of the issues that arise with moving to project fees, it is more likely that this becomes a hybrid model with a small retainer for a minimal account management resource and then project fees.
Specific versus Undefined
One of the key issues has been that while the marketers may have a broad scope of work or agency requirements, the definition of these agency outputs can be either highly specific, such as a television campaign of 30 second with cut downs, or it can be undefined such as a promotional activity and nothing more in regards to the specific requirements of this activity.
One of the reasons that marketers prefer the agency outputs undefined is that they do not want to limit the opportunities for the agency to provide input to the best way to execute the communication requirements. The issue with this approach is it can come at a premium.
Again, if the requirements are highly specified then it is simply a matter of being able to calculate an agency resource plan and then the retainer for the agency based on this specific scope of work.
But the less specified the requirements then the less accurately are you able to calculate the agency resource requirements and retainer. In this case it is more advisable to move from a retainer to direct resource costs or project fees so that the fees will be defined when the requirements are finalised and agreed.
High versus Low Volume
One of the advantages of the retainer is that it can reduce a huge volume of agency activities and projects into a monthly retainer fee. Therefore retainers are particularly efficient when you have high volume, fast throughput scopes of work.
This is particularly relevant for services companies such as financial services, telecommunications and retail.
At the other extreme, where the scope of work is particularly small, it is illogical to have a retainer model, as it is unlikely that the agency will need to retain resources throughout the year.
It is therefore better to have the remuneration linked to the specific outputs of the agency rather then spread throughout the year to ensure the agency resources are deployed on the projects at hand.
One Brand or Multiple Brands
Where this is a single brand or a single business, then the agency retainer and the specific agency resources being retained, are guaranteed to be deployed to the brand and business paying the retainer.
But where there is a number of brands or business units retaining the same agency resources under the one retainer, there is often concern that one business or brand is getting more resources than they paid for at the expense of the other brands or businesses contributing to the retainer.
This is particularly true where the requirements of the various brands and businesses vary greatly.
The high volume brand often feels like they are, and often are, subsidising the work of the smaller brand. But likewise the smaller brand feels like they aren’t, and often aren’t, getting the level of service and attention from the agency that they are paying for as their larger colleague demands overshadow them.
There are several approaches here depending on the efficiency of the retainer, the volume of work and many of the other issues raised above.
Seasonal versus All Year Round
Retainers are terrific when the scope of work is delivered relatively evenly across the whole year as the agency resources retained are evenly utilised throughout the year.
But imagine you have defined the scope of work and calculated the fee for the agency based on the required resources, but that the whole scope of work is to be delivered in half of the year and nothing in the other half?
The traditional retainer would pay the agency too much for the half a year when nothing is to be done and too little when the work is being done. This happens a lot with seasonal products and services.
Of course you could retain the services for six months only, but it is not really a retainer, as what are the agency staff to do for the rest of the year? Here is when project fees are ideal as they pay the agency when the work is undertaken.
Measurable Contribution
The most interesting opportunity is when the agency delivery of the scope of work makes a direct and measurable contribution to the outcomes delivered by the outputs.
In the most pure form this is known in the industry as direct response marketing. But increasingly the results of the agency outputs can be measured for effectiveness and contribution to sales, revenue and the like.
This is where you can develop true performance remuneration, where the agency is paid for this contribution. In direct response the fee is directly paid on the success, such as sales, or leads. For digital advertising designed to deliver leads and sales this also applies.
There is a hybrid model here too, where the agency is only making a contribution, the most common model is to put some of the agency retainer or project fee at risk and to pay the balance of the fee based on the results delivered.
Hybrids and Combinations
There are more remuneration models than the retainer, the direct resource fees and project fees. But almost all of them are based on the cost of the resources needed. Then there are still commissions based on spend and now output models based on placing a monetary value on the outputs.
But there is also a huge number of variations and hybrids of all of these models. The fact is that this is no best practice remuneration model. There are definitely common practice models being the retainer and there are emerging practice models such as output value models.
It is possible to choose any one model based on the criteria here, but true best practice remuneration is not a model, but a process to design a remuneration model that best fits the requirements of the marketer and their agency or supplier.
This is why we invest so much time and effort into getting this right for our clients.
TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.
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