“Some ad agencies get paid by results” by Lily Folwer, Marketplace (NPR) – Comment by Arthur Anderson

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Speaking as co-founder of independent advertising advisors to marketers, the approach of “Value-Based Compensation” has been work in progress for the last 15 years. The new news is that advertisers now take it seriously and can do something about it. Finally, no longer current is the old maxim “I know half of my advertising works but I don’t know which half”. The issue is to identify meaningful metrics for measuring 1) agency contributions and costs and 2) advertising value. This can be done by all advertisers and not just P&G and Coke.Arthur Anderson, New York, MorganAnderson Consulting

Friday, November 27, 2009

Article

A growing number of companies want to withhold some pay from ad agencies they use unless their marketing campaigns work. This new way of doing business could hit smaller agencies especially hard. Lilly Fowler reports.

Steve Chiotakis: You know, advertising revenues have been hit pretty hard in this economic downturn. Spending is reportedly down more than 10 percent. But that’s not the only bad news on Madison Avenue. A growing number of clients want to withhold some pay from ad agencies unless their marketing campaigns work. Lilly Fowler explains.


Lily Fowler: Procter and Gamble is the world’s biggest advertiser. Last year, the company spent close to $8 billion hawking everything from Pampers to Swiffer mops. So when P&G decided it wanted to change the way it pays for advertising, it put Madison Avenue on notice.

Richard Delcore: We’re going to pay them for good work. And we’re going to reward them with extra compensation if the brand grows and they perform well.

Richard Delcore is P&G’s finance director. He says the company used to pay ad agencies based on how many hours they worked, a measurement called “billable hours.”

But now, P&G is switching to a payment system based on performance. In place of billable hours, P&G pays a flat fee and offers back-end performance bonuses if an agency’s ad campaign boosts sales.

The bonus is around 10 percent of all new sales. P&G has these performance deals for more than 70 of its largest brands.

Swiffer Ad: Once you switch to Swiffer sweeper vac . . .

P&G isn’t the only big advertiser making a change. Coke says it will cover an ad agency’s cost to create a campaign. If the campaign pays off in higher sales, the agency gets up to a 30 percent bonus.

Ron Baker is founder of the Verasage Institute, a think-tank dedicated to burying the billable hour.

Ron Baker: It’s holding the agency to account for results, whereas under the billable hour, it was just, “hey, I spent the time.”

But the performance-based system comes at a tough time. The auto and retail sectors have slashed marketing budgets, and ad agencies have cut tens of thousands of jobs. And this new way of doing business could hit smaller agencies especially hard.

Steve Koskela is chief financial officer for Ground Zero, an ad agency in Los Angeles:

Steve Koskela: Nobody’s in this business to work for nothing. And I would argue the problem with putting such an emphasis on results, where 100 percent of the agency’s profit is locked into certain results achievement, is it assumes that the agency has control of all the variables to determine success. That couldn’t be further from the truth.

Like what if the product is poorly made, or if its price is too high?

Koskela: The agency gets punished for it?

Koskela thinks agencies and companies should agree on a fair price for their services. And leave it at that.

I’m Lilly Fowler for Marketplace.

Story as published on American Public Media’s Marketplace click here for the online publication.


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