Tim Williams on how North American agencies are transforming their approach to compensation

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Ignition Consulting Group Founder Tim Williams reveals how some North American agencies are transforming their approach to compensation using fixed, variable and dynamic price models. This …

Ignition Consulting Group Founder Tim Williams reveals how some North American agencies are transforming their approach to compensation using fixed, variable and dynamic price models. This presentation was shown at the IPA's Performance Adaptathon in London on 8th July 2014. Find out more at www.ipa.co.uk/adapt/performance and get involved in the conversation on Twitter #ipadapt.

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  • If you analyze the value propositions of most professional service firms, you’ll find they are based mostly on widely available overdeveloped services; they are placing themselves on the wrong side of the value chain. By focusing on the underdeveloped services in your industry – largely unsatisfied client needs -- you are in effect positioning the brand not just for where the profits are, but for where the profits will be.
  • If you analyze the value propositions of most professional service firms, you’ll find they are based mostly on widely available overdeveloped services; they are placing themselves on the wrong side of the value chain. By focusing on the underdeveloped services in your industry – largely unsatisfied client needs -- you are in effect positioning the brand not just for where the profits are, but for where the profits will be.
  • *In order to change what we care about, we must change what we measure.
    *If we measure just what’s easy, we’ll maximize what’s easy.
  • Chicago-based B2B agency 5MetaCom trades the hourly rate concept for a fixed price approach. In other words, instead of charging for time spent, they charge for services delivered. What’s the rule of thumb in setting a fixed price? This may sound simplistic, but the answer is “whatever the market will bear.” When a restaurant puts “market price” for an item on a menu, this is essentially what they’re doing.
  • One progressive firm makes this a common practice by serving up options that have different names, different metrics of success, and of course different prices. This is an effective approach because, once again, it shifts the discussion away from “How much time will this take?” to “Which of these options would work best for you.”

    And by the way, according to the principles of pricing psychology, guess which option clients will pick 87% of the time? That’s right, the middle one!
  • *In order to change what we care about, we must change what we measure.
    *If we measure just what’s easy, we’ll maximize what’s easy.
  • *For major food clients like Heinz and Del Monte, Pittsburgh-based Smith Brothers has outcome-based performance agreements that have resulted in 30% profit margins for this agency, even during the recession.
  • “Today, half of Mediabrands agencies are on pay-for-performance contracts, which tie compensation to business results.” (Adweek January 20, 2014)
  • At the media agency Universal McCann, half of the firm’s clients are engaged in some form of compensation arrangement where between 25% and 75% each media buying contract is earned through outcome-based compensation.
  • P&G has long believed in paying its agencies based on marketplace value instead of internal costs, their highly effective Brand Agency Leader model is based on writing one check to one lead agency, who then hires and pays other specialist agencies.

    *The check that P&G writes isn’t based on labor hours or hourly rates; P&G doesn’t believe they’re buying time. Instead, it’s based on outcomes.
  • On many major brands, Kimberly-Clark now pays multiple agencies based on shared KPIs, which ensures collaboration and alignment of economic incentives.
  • In addition to simple metrics like the ones just shown, you can also select and weight several key metrics …

    * … as in this example for a global bank, which pays its agency based on a combination of business, marketing, and customer measurements.
  • A firm representing a major bluetooth headset brand is compensated based on a royalty on sales.
  • The agency for a major luxury car brand earns $50 for every car sold in North America.
  • The agency for a major liquor brand receives $2 for every case sold in the U.S.
  • Vancouver-based Rethink, an agency with a reputation for innovation, does this with their “Rethink Rebate,” which they’ve had in place for well over a decade now.
  • *In order to change what we care about, we must change what we measure.
    *If we measure just what’s easy, we’ll maximize what’s easy.
  • Crispin’s Jeff Hicks once said (READ)
  • Southern California’s Palio+Ignite creates their own infotainment properties, such as a video game to help kids with juvenile diabetes learn how to use their insulin pump. The agency owns the IP and licenses it to their pharma clients.
  • Healthcare specialist CMI created a proprietary database platform called “By Doctor” that is the agency’s property, licensed to clients.
  • Rockfish – one of Advertising Age’s “Small Agencies of the Year” created their own product called Coupon Factory, which allows marketers to create their own digital coupons.
  • An agency I know in the midwest charges its mostly B2B clients not by the hour, but per qualified lead. Pretty smart.
  • In California an agency that does a lot of work building e-commerce websites charges not by the hour, but rather asks for a percent of first-year sales.
  • Here’s what I mean. Think for a moment about your the way you personally invest your money -- your financial portfolio. If you have a good financial advisor, your portfolio is diversified; it balances risk against reward, and has a number of different levels of risk built into it.
  • The agencies that are innovating when it comes to compensation bring a similar philosophy to their compensation portfolio. *Some agreements are low-risk low-reward, *some are medium-risk, medium-reward, and *some are high-risk high-reward. But overall -- just like a good personal financial portfolio -- the return is higher than if it were just a single way of getting paid. I can tell you that the agencies who approach their compensation agreements in a diversified way earn much higher margins than the industry average.

Transcript

  • 1. HOW SOME NORTH AMERICAN AGENCIES ARE TRANSFORMING THEIR APPROACH TO COMPENSATION Presented by Tim Williams ignition consulting group www.ignitiongroup.com twilliams@ignitiongroup.com @TimWilliamsICG
  • 2. CLIENT: I want to hire you for your expertise and your ability to create and execute transformational business ideas for my company. AGENCY: Excellent, we are ideal for that challenge. CLIENT: Yes, but before I hire you I have a few important questions. AGENCY: Okay, shoot. What do you mean? CLIENT: What will you charge me? AGENCY: $1 million dollars for our ability to work with your organization to create the idea, and then if we move it forward another million because truly transformational business ideas are valuable and in limited supply. CLIENT: Why $1 million? AGENCY: What do you mean? Jason DeLand Partner, Anomaly
  • 3. CLIENT: Well if I understand how you arrived at it, then I can negotiate it down. AGENCY: But I don’t want you to negotiate it down. That is money out of my pocket. CLIENT: Yes, but it’s a privilege to work on my brand and you’ll get lots more business from it. AGENCY: I will? Can you guarantee that? CLIENT: No. But I still need to know how you got to your price. AGENCY: Well, OK...I looked at the size and scope of the opportunity and considered the value of us addressing it for you and calculated a price that I am willing to do it for. A price that I believe to be competitive in the market and a price that affords me the peace of mind that I can make a bit of money. CLIENT: Oh, but I need more than that. I need to know who will do the work... and the amount of time it takes for them to do it. AGENCY: The team I said will do the work...and it will take as long as it takes until we have an outcome that everyone is happy with. CLIENT: Yes...but what if just one person cracks it in one day...and you then execute it with a small team in three weeks – that is not worth a million dollars. AGENCY: You’re 100% correct. It’s worth more.... If that happens, we will double it!
  • 4. Three basic value pricing approaches ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage.
  • 5. 1. A fixed price based on perceived value What is the customer willing to pay?
  • 6. 1. A fixed price based on perceived value
  • 7. What different options could we offer based on a fixed price? 1. A fixed price based on perceived value
  • 8. Three basic value pricing approaches ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage.
  • 9. How can we get paid in a way that aligns the economic incentives of our two companies? 2. A variable price based on outcomes
  • 10. 2. A variable price based on outcomes
  • 11. 2. A variable price based on outcomes
  • 12. 2. A variable price based on outcomes
  • 13. 2. A variable price based on outcomes
  • 14. Agency compensation determined by three factors: Sales 50% Market share 25% Agency performance 25% 2. A variable price based on outcomes
  • 15. 2. A variable price based on outcomes
  • 16. On many major brands, pays multiple agencies based on shared KPIs, which ensures collaboration and alignment of economic incentives.
  • 17. Global bank
  • 18. Corporate Marketing Goals Creative Testing Agency Performance 50% Brand Relevance Rating 30% Core Preference 20% Product Mix Rating score on 7 factors 30% Client A 20% Client B 10% Client C 10% Client D 10% Client E 10% Client F 10% Client G 100% 50% 20% 30% Outcome-based agreement for major technology brand
  • 19. Bluetooth headset brand Royalty on sales
  • 20. Luxury car brand $ per car sold in North America
  • 21. Liquor brand $ per case sold in U.S.
  • 22. Three basic value pricing approaches ① A fixed price based on perceived value. ② A variable price based on outcomes. ③ A dynamic price based on usage.
  • 23. 3. A dynamic price based on usage. How can we get paid for the use of this idea rather than just the production?
  • 24. “Advertising is not a service business. We’re a product business, like publishing and other businesses that deal with intellectual property.” Jeff Hicks Vice Chairman, Crispin Porter + Bogusky
  • 25. 3. A dynamic price based on usage.
  • 26. 3. A dynamic price based on usage.
  • 27. 3. A dynamic price based on usage.
  • 28. B2B marketer Per qualified lead
  • 29. E-commerce website 15% of first year sales
  • 30. YOUR PERSONAL FINANCIAL PORTFOLIO
  • 31. Low-Risk Low-Reward Medium-Risk Medium-Reward High-Risk High-Reward THE AGENCY COMPENSATION PORTFOLIO
  • 32. “Every year we don’t know what 30% of our compensation will be because we have placed bets on ourselves.” Jason DeLand Anomaly
  • 33. www.IgnitionGroup.com @TimWilliamsICG @IgnitionGroup www.linkedin.com/in/TimWilliamsICG Propulsion Blog www.IgnitionPropulsion.com