Wednesday, August 12, 2009

Value-based billing: Agencies at the table?

Bloomberg posted a story on P+G's decision to move Grey Advertising's work on Pringle's to a value-based compensation setup last month (here). All I can say is, it's about time!

I've worked at two companies whose billings were tied, in part, to performance-based incentives derived from the client's overall success. And while the P+G move (along with several other consumer companies) comes later in the game, it's also a bit more comprehensive.

Some in the advertising business are worried that it is merely a ruse to reduce fees. Others seem to embrace the concept. Here's four reasons I think it's a good thing:

1. Results: In my experiences with value-based billing, the discipline of evaluation creates discipline in the thinking. I'm not talking about stifling creativity. On the contary, agencies get passionate about the work...the risk is that they get wedded to an idea even when it can't deliver results. Value-based approaches that rely on meaningful measurement ensure that outcomes are considered throughout the ideation and execution.

2. Trust: When an agency's financial success is tied--directly--to the business success of the client, it makes the partnership more meaningful and easier to understand for both parties. Both parties can trust that they are working together for the same thing. And of course, trust is a key element of any long term relationship.

3. Strategy: Much talk is made of being strategic in the agency business. However, much work ends up being quite tactical in the context of larger business go-to-market strategies. When agencies are seen as partners, sharing the risk based on business strategies, they may find themselves earning a seat at a much larger table.

4. Inevitability: It isn't going to go back to the way it was. For decades, marketers half jokingly used the quote that "half their advertising worked, they just didn't know which half." But now the precise measurability that comes standard with all things digital is seeping into the expectation of all marketing and advertising.

Of course there are risks to the agency...that's the shared part of shared risk...some clients may use it as a means of giving agency billings a beat down. Others may pursue ill-conceived or simplistic measurement schemes. And the biggest risk is that the agency's work is held directly accountable for things it can't impact directly.

But while these risks are real to agencies, it may be wise to remember that clients has always taken a very real risk with their agencies when payng upfront or for hours worked. It may just be that, like their customers, companies have decided they'd like a little less risk in their worlds. Agencies that embrace value-based approaches may benefit by getting a more enduring seat at the table...instead of a place on it.


  1. Thanks for your positive comments about value-based compensation. Your four points are all positive affirmations of why it makes more sense to be paid for the value you create rather than the time you work.

    Tim Williams
    Ignition Consulting Group

  2. Well said Jeff.

    We need as many people as possible explaining to the world that the old way is adversarial and only ever in the interest of one party or the other - Client wants quick fix; "supplier" wants slow fix!

    Value based pricing has so many good things going for it from both parties' points of view. It allows "That's a bargain!" to co-exist wit "That's highly profitable"!

    We need as many people as possible spreading the word, not because it's a weak message or there aren't many of us, but because the sooner the world switches to Value-Based Pricing, the better the place will be for everyone.