4 steps for developing a pay for performance agreement
If your marketing agency is not offering a pay for performance type of agreement yet, it is inevitable; wouldn’t you prefer to be ahead of the curve?
Pay for performance is becoming a more appealing option to marketers who have been searching for ways to manage increased demand on ROI and making sure that they are getting the most from every dollar they spend. Procurement departments have become more involved in every aspect of marketing and have been the cheerleaders for marketing arrangements such as this. The fact is they were strategically brought into the mix to develop plans and procedures that are structured to their company benefit.
Perhaps that is one of the reasons marketing agencies have stayed away from offering pay for performance as an option. At first glance, it seems that the pay for performance approach benefits only the marketer and not the agency. There are many reasons for this train of thought, such as trying to measure something that can’t be measured, or basing things on activity that is completely out of the control of the agency or its activities. Agencies have traditionally stayed away from this type of structured arrangement simply because it seems too one-sided. But that doesn’t have to be the case.
To help soothe the tensions surrounding this topic, here are four steps we have found successful in determining if a pay for performance agreement can be a win-win situation for everyone.
1. Evaluation. The first step is to complete a thorough evaluation to determine if a marketing campaign will fit into a pay for performance model. The evaluation should include the following items for consideration:
The purpose or scope of the project—Evaluate the overall objectives and goals of the marketing project. Is the purpose of the marketing campaign to acquire new customers, increase transactions, gain participation in a loyalty program, upsell products/services, etc.? It could be a combination of things.
The marketing channels to be utilized— The evaluation process should take into consideration the marketing channels that will most likely be utilized. Decide if those channels can be effectively measured and monitored. The marketing agency must be able to ensure that it can apply analytics and techniques that constantly measure results from those specific activities and be able to make adjustments to optimize the performance of those channels as the project progresses.
Establish a baseline— Without a baseline, it’s almost impossible to develop a pay for performance agreement because there isn’t a solid starting point. Take into consideration the specific activities that will be measured for success of the marketing campaign. The baseline will provide the starting point to effectively measure results.
Constraints and limitations— Consider anything that might affect the project (e.g., timing, existing resources, availability and access to data, authority for making changes, security, etc.). Anything that could potentially be a hindrance to the overall campaign must be considered.
Keep it simple— The more complicated the agreement is, the more difficult it becomes to execute and measure it. During the evaluation, if the marketing campaign becomes too detailed and complicated, it’s more likely a pay for performance approach will not work. There may be an alternative possibility to apply a pay for performance approach to only a portion of the campaign.
2. Negotiation. If a project evaluation determines that a pay for performance model may be applicable, then the negotiation stage should begin. This is often the most important and most challenging step in developing a pay for performance agreement. The marketer and the marketing agency will need to agree on the metrics of the contract. They will also need to agree on which portions of the project will be subject to the pay for performance model and which portions will be paid for on more traditional terms.
Make no mistake about a pay for performance agreement: There is no scenario in which a marketing agency is going to take 100% of the risk up front. A portion of the agreement will be based on a more traditional contract structure. It can be a monthly retainer or predetermined amount charged at particular intervals. It can be a tedious process, making sure that there are clear directives for each part of the project. This would include the pay for performance success markers that will need to be agreed upon. Once the marketing campaign hits a predetermined success level, payment for that level would be due according to the payment details negotiated in the pay for performance contract. For example, a marketing campaign with the goals of generating increased website traffic and lead generation may call for the marketing agency to develop resources such as blog articles, ebooks, videos and other content specific for the project. A portion of the costs to develop these resources may be payable upon completion (the more traditional approach), while another portion, the increase in website traffic, may be subjected to the success of these resources (the pay for performance metrics.)
3. Collaboration. Once the evaluation and negotiation steps have been completed, the marketer and marketing agency will need to have their teams working together at every stage of the agreement. Designated team members from each side will need to oversee and communicate on development, execution, monitoring, optimizations and achievement milestones. There must be agreement on aspects such as:
Reporting—What will be reported, in what format, how often and who will receive the reports, etc.? The aspects of reporting will have to be developed and laid out in the collaboration process.
Intervals—What will be the agreed-upon intervals for the campaign? What will be expected by when? Will success be measured on results each month, each quarter, etc.? When and how will the team meet to discuss optimization and results? When levels of success are achieved, what are the intervals of compensation?
These are a few of the areas of collaboration that will provide the basis of a pay for performance agreement. Remember, in a pay for performance agreement, all members involved have a stake in the success of the project. With skin in the game, as it is referred to, collaboration becomes a key aspect to the success overall.
4. Execution. When all parties are comfortable with the agreement, the team members assigned and the strategic approach, the project execution can begin. Keep in mind that the collaboration will continue throughout the execution phase until the project is completed or until the contract is renewed or extended.
These four steps are obviously more involved than the brief descriptions I’ve given. There is a lot that goes into the development of a pay for performance agreement. But one thing is certain: marketers are itching for these types of pay for performance marketing campaigns. To learn more about what types of programs can be adapted to a pay for performance model, contact me. Or sign up for our personalized webinar on optimizing your communications and programs for greater response and performance. Our webinar will review your current marketing activities and provide opportunities for improvement and optimization, like implementing a pay for performance model.