Steps to creating a price-based agency compensation model


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Darren Woolley, MD of TrinityP3 provides steps to creating a price-based agency compensation model

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Steps to creating a price-based agency compensation model

  1. 1. Steps to creating a price-based agency compensation model TrinityP3 Pty Ltd 2013 © Copyright 2013 marketing management consultants
  2. 2. What is a price-based compensation model? •  Most current compensation models are either spend-based (commission) or cost-based (head hours and retainers).•  A price-based model sets a price, or monetary value on the individual outputs of the agency.•  The advantage over the popular cost-based model is that it takes into consideration more than just the actual resources required and sets a price reflecting the value. marketing management consultants
  3. 3. How do you develop a price-based model? •  The approach for developing a price-based model is: 1.  Defining the outputs required of the agency. 2.  Defining the operational parameters. 3.  Calculating the resource requirements and cost of producing these outputs. 4.  Adjusting the valuation based on the strategic importance. •  marketing management consultants
  4. 4. Defining the outputs required of the agency •  You define the tasks, outputs or •  TrinityP3 has developed pricing deliverables you require of the agency. models with five task types, 40 output •  This can be quite specific and types and more than 300 different granular eg. Full page press. defined deliverables. •  It can be broader eg. Magazine ads or campaigns. •  The granularity / number of project •  It can even be top level eg. All print types depends on the brand strategic ads or campaigns. requirements.•  It is essential to clearly define the Example - Develop TV Campaign; details of each category including •  Includes briefing, comms strategy and process and final output. creative concept development, concept testing research attendance, production and creative supervision.•  This detail allows accuracy in calculation and consistency in •  Typically will have three or more approach. executions of more than 15 seconds in length. •  All external costs excluded. marketing management consultants
  5. 5. Defining the operational parameters •  Each brand team in each market will •  These parameters directly impact on have different operational the actual cost of delivery as they requirements of their agency. impact resource utilisation.•  These operation variables can include: •  The more consistently the parameters •  Number of concepts presented. are defined, the more consistent the pricing model. •  Research requirement. •  Work In Progress meetings. Example – Brand Strategy Development; •  Approval processes. •  Occurs annually by brand. •  Requires representatives from account•  These operational requirements need management, creative and strategy. to be defined at either a brand level, market level, regional level or global •  A maximum of five agency staff level. prepare and attend. marketing management consultants
  6. 6. Calculating the cost of these outputs •  The cost is based on two elements: •  TrinityP3 define four major categories •  Cost of resources – including of agency resources: salary, overhead and profit. •  Account management. •  Resources required – including •  Strategy. level and mix by discipline. •  Technology. •  Production.•  TrinityP3 uses historically collected resource requirement data (both •  For each category and in each market industry and client specific). we produce a blended or weighted average charge out rate.•  TrinityP3 also uses charge out rate data or calculates charge out rates •  TrinityP3 also applies low, median and from salary data for each market. high benchmark reflecting the variance in agency types. Example: Small versus large, Independent versus Multinational. marketing management consultants
  7. 7. Adjusting valuation for strategic importance •  The price calculated is simply a •  Apart from using the Low, Median and process of multiplying the blended High for the type of agency, it can also resource rate by the benchmark level be used to classify the strategic of resource hours required by importance of the project. resource category. Example – Brand versus Promotional TVExample: Account Management Hours x Commercial;Account Management Blended Rate + •  Rationally it takes the same number ofStrategy Hours x Strategy Blended Rate resources to make a brand TVC as a+ Creative Hours x Creative Blended promotional TVC.Rate + Production Hours x Production •  However, a brand TVC will have aBlended Rate = Price for Output. much higher level of media investment•  This calculation provides the cost of over a longer period of time. the service but not the value to the •  Therefore it is High Value and you brand. would use the High Price. •  The promotional TVC may run for only a few weeks and is therefore Low Value using the Low Price. marketing management consultants
  8. 8. The price-based compensation model •  When implementing the price-based •  On the plus side the price-based compensation model it is important to compensation model provides many remember: benefits to marketers and agencies •  The purpose is not to compensate when properly implemented including: the agency for every hour of •  Providing alignment between the resource they use but to provide a marketer and the agency on the fair price reflective of the value of strategic and financial importance the task delivered. of each project. •  It requires clearly defining the •  Significantly decreasing disputes on expectations and requirements of resources and project over-runs. the agency so they can manage •  Allows brand teams to better their resources to deliver these budget their project costs against costs and time effectively. agreed fees for service. •  Inefficient processes, such as •  Provides an accountable user-pays excessive iterations of creative system, eliminating the unseen concepts, repetitive meetings, subsidizing which occurs in many protracted approval processes will multi-brand retainers. negatively impact the agency’s profitability. marketing management consultants
  9. 9. For more information contact… @trinityp3 TrinityP3 Pty Ltd Sydney +612 8399 Melbourne +613 9682 6800TrinityP3 Hong Kong +852 3478 3982Darren Woolley Singapore +65 6631 2861 marketing management consultants