RE:Should there be a cap on P4P compensation?

Compensation should be fair. If an agency normally charges $500/hr for work (for example)but the client is unable to make that number seem to work in their budget, they may ask the agency to “share in the results” so that both benefit. If the agency takes the risk on the front end, (when there is limited visibility to payments) why should they be penalized on the back end (when there is clear visibility for payment) for doing a good job?

I believe value based pricing is an appropriate road to take for marketing. There are differences in the B2B vs. B2C discussion however.

In the B2B world marketing and sales are converging. They only exist to drive new customers and more revenue. It can be adopted easier here with targeted efforts toward very specific buyers and 1 to 1 interactions. Leads, opportunities and sales are fairly simple to track. Therefore, your efforts should be focused on these types of tactics.

In the B2C world mindshare for instance is difficult to measure. An uptick in Coke sales within the southeast region could be attributed to a stellar campaign but requires research, surveys and analytics to quantify. What if spring arrived early and there were more outdoor events, parties, picnics, etc… Did that have an impact on Coke sales? I think we may see more campaigns focused on measurable results in the B2C space. Specific Promotions or even web based tactics that have a tracking mechanism. As traditional print dies, TiVo and DVR’s spread and the internet grows, trackable spend will be a priority.

In all I feel that a call to action with a metric will be the direction we head toward. As “social media” continues forward and the obsession with conversations increases, 1 to 1 will be the focus and tracking that conversation or interaction through the process will be the Holy Grail. I see the big ad campaign falling by the wayside eventually. Do you really want to by Geico insurance because of the Lizard or do you want to buy because your neighbor, a member of your facebook community had a great claims experience and talked about it to you in person or on your online discussion group? See what I mean?

Marketers will be held to task and value based pricing and a shared risk model is a good idea. The metrics will drive the tactics. If it is measurable it will be a tactic in the tool kit. If it is not it will be difficult to agree on during negotiations.

Just my 2 cents…

Coley

“How much risk is fair for the agency to assume? How much upside is fair?”

A fair, and tough, if not impossible, question to answer.

My quick thought is that this answer would always be different, and must always be a determined from a strong win-win negotiation with the client. Any determination of an agreement that’s not based on the win-win premise is a recipe for disaster.
If you come across in setting up a level of risk that your are happy with, and you know that its not in the client best interest, only yours, well, then you’re playing with fire. Much more time and effort should be spent on making sure the risk sharing is win-win. That would go a long way.

Being new to this industry…I’m not sure what the best situation is. I feel that you should certainly be paid for the work you put into the newsletter regardless of the amount of clicks. You work hard to put together the best product you can, and we cannot control traffic all of the time. I agree with Arthur…risk sharing in this arrangement needs to be win-win, especially in this economy.

Pay for performance will continue to be more quantifiable because of an obvious trend toward online “living.” Check this out: Google News Search is used over 15 million times per month vs. the NY Times which as a 1 million monthly readership. There are 130 million blogs and people watch over 250 million videos. Look at Susan Boyle, an overnight INTERNET singing sensation. That’s how she’s billed — an “Internet” sensation. So, what does this tell us. Pay for performance could be segmented into three groups: base, middle and top. Base is the minimum set of expectations, and so forth. Giving three ranges of metrics either in sales, sales leads, media placements(make sure you rate them A-list, B-list/one WSJ article may equal five trade mags)leaves the door open for the marketing firm to be compensated for their work AND to be compensated for work above and beyond expectations (why not grab that bonus for excellent work!). In fact, I think this is such a great idea, I’m taking it to our vp and telling him to use it in our marketing firm’s next proposal. Thanks for the inspiring chat!

Here are a few great links that discuss this same issue:

http://ana.blogs.com/liodice/2009/05/compensating-agencies-the-coke-way.html

http://cmorants.org/2007/11/performance_based_compensation.html

Coke Pushes Pay For Performance Model (http://adage.com/article?article_id=136266)

http://www.b2bbranddebate.com/?tag=performance-based-agency-compensation

http://www.allaboutbranding.com/index.lasso?article=306

The gaping flaw in the P4P Theory (http://brainsonfire.com/blog/index.php/2006/03/30/performance-based-compensation/)

http://www.spinsucks.com/prsa/value-based-agency-compensation-models#comment-11378

As a cold-eyed customer my initial reaction is that print or broadcast media results from press releases should be very quantifiable as some multiple of regular ad rates, e.g. 1.5 X large print display ad, 3-4 X prime time broadcast advertising spot.

Vis a vis e-mail newslatters, etc. I wonder if it wouldn’t be in the marketing firm’s best interest to “claim” those prospects to a large degree — specially if one is working from a mostly cold list — for measurement of success. Any contacts, relationships and eventual business emerging from that list are creditable to the marketing firm.

I will readily admit that my knowledge of the nuances of your industry are foreign to me, but in thinking through this scenario a few issues come to mind.

Specifically, in a P4P contract the agency must be critical of the product/service for which it stands to either profit or lose from. This level of business acumen for a particular client vertical may not be readily available within the agency or its network of partners and advisors.

These kinds of contracts will force the agency, for better or worse, to act more like an actuary and thus take far less risk.

What I found amusing was this link: http://www.b2bbranddebate.com/?tag=performance-based-agency-compensation

since my very first thought when looking at this problem was, “A hundred million dollar ad campaign wasn’t going to make New Coke a successful product.” Hilariously, Coke now wants its agencies to take on the burden of ensuring marketing and brand success while having no control over the product offerings; we also can’t forget the inherent competitive/PR/economic risks that exist in all markets.

Ultimately, on a smaller scale P4P can be tenable with a decent percentage of the agency’s costs guaranteed, but I just don’t see this kind of structure scaling-up very well.