These agreements remunerate the agency based on pre-agreed performance metrics where the levels of remuneration received are determined by business performance. To be successful it needs to balance risk and reward for the agency and not simply be a way to reduce agency fees.
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- Performance based fees have a reputation for being difficult to implement and have poor outcomes. This is usually because they have been badly implemented to lower agency fees.
- It is also because often they are based on ‘soft’ measures such as relationship and task performance and not measurable marketing and business metrics.
- They ideally work in direct response business models where the agency inputs have a direct and measurable result.
- It also requires a balance of risk and reward for the agency and therefore setting metrics and fees is critical in getting this right.
- Performance based fees are often part of a hybrid model where the base fee is paid to the agency with a performance component on top.
Advantages
- Encourages the agency to focus on delivering value through performance.
- The marketer can achieve savings on marketing costs when it is experiencing poor performance results.
- The agency profit is generally increased substantially through the delivery of stretch targets, which often has a strong positive commercial impact on the business.
Implications
- Can be hard to budget if the ‘likely’ amount of any performance element is not known till a specific period close dates where sales are involved.
- KPIs need to be realistic and relevant or the framework can become de-motivating for the agency.