The Future of Marketing Agency Pricing and Compensation

By | January 23, 2017
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Jason BrewerThis is a guest post from Jason Brewer (@jaybrew). Jason is founder and CEO of Brolik, a digital agency in Philadelphia. As an entrepreneur, Jason is passionate about helping other business owners navigate the complicated journey of owning a business and developing strategies to grow their brand.

Ask agency owners about their pricing strategies and they might look at you with a blank stare. That’s because agency fees are commonly based on inputs, and are lacking any form of strategy for maximizing the skill and performance of their team to increase profit.

Agencies need to be open to new compensation models that align their goals with those of their clients. Pricing based on an input like a billable hour puts a ceiling on potential profit and creates a perception that the agency’s service is a commodity.

When it comes to pricing strategy, the hourly rate says commodity.

So What’s The Future Of Agency Pricing and Compensation?

I can’t offer a bulletproof solution when it comes to improving the agency compensation model, as I'm trying to figure this out like everyone else. However, I’ll share a helpful parallel, and see if it starts some healthy conversation. I’ll point you toward the NFL. Contracts are negotiated with total contract money, some of which is guaranteed money, and often there are incentive bonuses. This puts risk on both sides of the deal.

Let’s call it a hybrid compensation model. The brand offers guaranteed money to the agency as part of the contract, split between a signing bonus to cover initial research and planning (this investment is a sign that the brand is devoted to the agency for a period). This protects the agency from putting in an abundance of research and strategic work early on without being compensated. It also allows the agency to be dedicated to the brand’s mission and project because they know the brand is invested in them financially.

Next, we trim down the big salary. In agency terms, this means less cash compensation. We lower the minimum monthly fee to just enough to keep the agency fueled and focused during the engagement. Let’s say this is a 25-50% discount on hourly rates if you can’t find any other way to calculate it.

Finally, add incentive pay in the form of a performance bonus or revenue share. To achieve this, the agency must reach a specific attainable goal agreed upon by both parties. I’m not saying this is easy to negotiate, but it forces the brand and agency to compromise and live in the same reality. Often brands engage agencies expecting way more than is reasonable, and the agency doesn’t realign these expectations before signing a contract. This is a recipe for disaster.

With the performance bonus, I suggest an upside revenue of 2-3x the base discount for the agency to account for the risk. So, for example, if the agency agrees to a $5,000 per month fee instead of their usual $10,000 per month fee, the agency must be able to achieve $15,000-$20,000 in total monthly compensation, but only if they perform at a high level and exceed expectations. This may seem aggressive, but the client only pays for this bonus if the agency is succeeding, which means the client can afford the bonus compensation.

In a performance marketing model, the business growth needs to be great enough that both parties are happy with their share of increased revenue and profit. The deal may be difficult to structure, and more complicated than the billable hour, but we need to find a new way. It’s worth the work.

Keys To Success

My parallel to NFL contracts may or may not be the right answer. I’m sure there are valid arguments against this type of hybrid model (and please reach out if you have them). Let’s move past the specifics of my example and summarize the key to success for agencies and brands as the takeaway here.

  1. We need to get away from input thinking and hourly billing
  2. The risk needs to be shared by both parties
  3. Both effort and performance need to be rewarded
  4. Agencies need to feel secure so they can invest fully
  5. Brands need agencies to be invested and focused on outcomes so they can achieve desired results

If you can achieve 1-5 above, I think you’re onto something. Both agencies and brands need to work together to get the most out of their relationships, but it starts with the agency breaking old habits and charting a new course.

Marketing Agency Insider editor note: Interested in exploring alternative agency pricing models? Check out Point Pricing: The Story of How We (FInally) Eliminated Hours From Marketing Agency Pricing as a related read from MAI founder, Paul Roetzer.