• by Jonathan Ragals , March 22, 2006

With interactive media becoming increasingly more accountable and marketers changing ad agency partners ever more frequently, the time has come to assess whether the traditional client-agency model needs to be replaced with a strategic partnership built upon a mutual alignment of interests.

The root of the problem lies in the standard agency compensation system and its impact on the client-agency relationship. While there has been talk for years about moving to a performance-based partnership model, marketers and agencies have not taken the necessary steps required to effect this type of change on a broad scale. Ultimately, a model combining the traditional agency retainer with a performance-based upside will drive the best long-term results for marketers and agencies that can adapt to this new paradigm.

Traditional Agency Models

The most prevalent models among interactive media agencies have been adapted from traditional advertising agencies. Pricing is usually some combination of a monthly retainer and a commission based upon media spend. This predictable pricing structure allows the agency to plan for business growth and staff accordingly. The agency can focus on providing value and strategy to its clients.

A common pitfall of the traditional approach is that in this relationship, it's more difficult to build a relationship built on open dialogue and trust, when telling the client what it wants to hear is the safer route toward renewing the account. While all agencies don't employ the "yes-man" mentality to retain their clients, the mere concern can quickly become a barrier to bilateral trust between agency and client. Clients are cognizant of this and often feel that browbeating is the best way to get maximum performance from the agency. Unfortunately, this dynamic is neither healthy nor optimal for creating a long-term, mutually beneficial partnership.

Performance Compensation Model

In theory, interactive media's accountability has made performance-only pricing a possibility. In this model, the client only pays when the consumer conducts a mutually agreed-upon action, such as filling out a registration form or completing a purchase. While this model works as a component of a media plan, it is an ill-suited model for an agency. The client's long-term strategic interests can be jeopardized by the agency focusing entirely on day-to-day gains at the expense of a holistic long-term approach to the brand and the campaign.

Instead, alignment of interests or risk can be created through a hybrid model that combines a monthly retainer with strong economic incentives based on achievement of specific, measurable performance milestones. The client is charged a lower fixed retainer with incremental compensation tied to performance. The mutual benefit is that the client sees the agency working for every last dollar and the agency has a floor on income that covers most base costs. The framework for mutual trust is in place.

The biggest challenge is determining how success will be measured. Establishing a benchmarking period helps set realistic expectations. Some metrics, such as branding measures, are much harder to account for in such an arrangement. Also, the client must share detailed transaction and financial data with the agency. The performance model only truly works if the client is completely open.

Most agencies also have an organizational challenge in that their culture and their compensation systems are not set up to support a performance model. Closing the loop on the alignment of interests down to the account team level is a vital and often overlooked success factor.

When the agency and advertiser are ready to move to the hybrid model, there are significant advantages for both. The agency serves the client both as a strategic advertising advisor as well as an aggressive hedge-fund trader laser focused on delivering results. The agency is empowered to make changes on the fly to improve performance while accounting for the client's long-term goals.

This new model will not work for every advertiser, and most agencies are not yet equipped to shift toward performance-based pricing. The challenges will slow the emergence of this model as the de facto standard. However, agencies and advertisers engaging in the new model stand to form lasting partnerships, with tremendous upside for both parties.