This is my first post back after a great friends and family holiday. If you click on the bottle of champagne, you will see it "blow its top". This symbolism ties in with buyers and sellers of SEO services who "blow their top" too frequently due to credibility and educational issues. So, in an effort to help the Search Marketing Industry grow, I will continue with my "one suggestion" to help.
My "Part V" last post of 12/18/05 goes into the "win-win" aspect of Benson Shapiro's "Is Performance-Based Pricing the Right Price for You?". So, is this compensation concept growing, especially with traditional advertising agencies? Mr. Shapiro says: "Performance-based pricing is growing because 1) its economic logic is so powerful; 2) it provides new opportunities for buyer/seller communication; and 3) it has been proven in practice." He then points out "Even Procter and Gamble, the last major consumer packaged goods advertiser to stay with a 15% fee, is moving in this new direction. It is sometimes a pragmatic pathway to managing risk, uncertainty, and performance for the long-term benefit of both parties." This was written back on 7/22/02, so let's look at then and now.
Mr. Shapiro goes on to say: "Advertising has been a fertile field for performance-based pricing. The September 14, 1998 issue of Advertising Age reports that the percentage of marketers who compensate agencies on billings (media purchases) dropped from 71% in 1983 to 35% in 1997. Furthermore, the average profit margins of large agencies, according to a study by Morgan Anderson Consulting, went from 13% to about 19%. This demonstrates how profitable performance-based pricing can be."
As of 5/5/04, According to the 2004 Association of National Advertisers (ANA) Agency Compensation survey, "Advertisers continue to increasingly use performance incentives to compensate their agencies, the survey found, although at a slower rate than in previous years. Some 38% of respondents use performance incentives for one or more of their agencies, up from 35% in 2000. This increase appears to be having an impact on agency performances well – 68% said that incentives improved performance, up from 58% in the last survey." It also said: "Use of performance incentives rises as more than 50% of large advertisers now rely on this method of compensation."
The American Association of Advertising Agencies (AAAA) had their annual management conference in May, 2005 (according to that AdWeek excerpt) at which the "4A's chairman Ron Berger quoted Benjamin Franklin's personal motto—'Annuit coeptis. Be favorable to bold enterprises"—to illustrate that 'if you want to make a buck, you are going to have to take some risks.' Then "Andy Berlin, CEO of WPP Group's Berlin Cameron/Red Cell, urged agencies Friday to demand more pay for work that drives sales. Agencies and clients should establish a fee structure in which they share not only production and media costs but also financial rewards for moving product, Berlin said. 'Clients live and die by what we do,' he said, 'yet under the most common of today's deals, bad advertising and good advertising are compensated exactly the same way. If fair practices aren't implemented soon, the big risk is that we're not going to have an industry,' he said."
To get back to an update on P&G, that AdWeek excerpt said: "Susan Gianinno, North America CEO of Publicis, said Berlin's idea is"old news for people involved in the 4A's. We've been working on it for years."She said Procter & Gamble's Jim Stengel has already implemented a system in which agency compensation is tied to product sales." This Performance-Based Pricing P&G initiative really dates back to this 10/8/99 P&G article in which the president of a traditional advertising agency says: "The challenge to such an incentive plan for local advertisers and their agencies is "determining a formula for the upside, coming up with something measurable that can be tied back to the advertising."
Wow, is that formula made easier with trackable online "actions" like this self proclaimed "Communications Consultant" firm (ZAAZ) says on their web site: "Typical key outcomes: purchase; registration; newsletter sign-up; simple contact; repeat visits." However, I am of the belief that only ONLINE PURCHASES should be a metric in determining a "formula for the upside", since the SEO firm or Advertising Agency has little or no control over offline purchases, in my opinion.
That is why I believe that a more pure (vs. the current "agency costs guaranteed + bonus incentives") Performance-Based compensation plan for traditional advertising agencies has not been adopted. But, technological ad tracking advances like Ad-iD that work across all forms of media (not just Internet ads) may help "track, verify, and measure the effectiveness and ROI of advertising. Ad-ID is also likely to facilitate innovations in ad management and cross-media analyses."
At the risk of repeating myself from a previous post, my 2006 forecast is that the customer and client will want even more POWER in determining how they pay their vendors and consultants, more RECIPROCITY in having open, honest, upfront and good collaborative communication, more PRECISION in the type of results they're paying for, and more ROI RELEVANCE in what they pay for. These are the principles of Yankelovich Partner's "Concurrence Marketing" that I believe can, and should, be applied to clients and customers as well as consumers. That said, I still agree with Mr. Shapiro that "Performance-Based Pricing" is not right in every situation. I'll delve into that more in my next post.
Animated image courtesy of www.artie.com.
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