Ideally, every company wants to have a good relationship with their media agency – a relationship based on trust with both parties making a fair share of profit. This isn’t always the case, but what some people don’t realize is that how they choose to pay their agency directly affects the relationship.

As a client, if you think you’re paying too much for mediocre results you’re going to get a bit grumpy with your agency. On the other hand, if an agency puts in extra work for a demanding client, but then the agency realizes they’ve spent too long on the project and lost money (it happens) the relationship will quickly turn sour. The right payment model can prevent both situations and ensure you maintain a good working relationship.

Here’s a breakdown of the two most common payment models:

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Fixed-Fee Model‍

A fixed fee model is how most clients pay their media agencies. Either the agency will estimate the cost of the project before starting work or charge you a fixed percentage based on your media spend. This model also includes monthly retainers, where a fixed fee is paid each month.

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Pros

• Costs are easily budgeted for
• Everyone understands the model as it’s the traditional way of working
• Doesn’t require sophisticated tracking to calculate attribution
• If something goes wrong or the job takes more time, the price doesn’t go up

Cons:

• Agency and client objectives are not aligned
• The agency isn’t directly incentivized to make your campaign the best it can be
• The agency doesn’t benefit from suggesting new ideas or experimenting
• If the campaign fails, the agency still gets paid the same (but they may lose the account!)

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Performance Payment Model‍

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A performance payment model is when you pay your agency based on the effectiveness of the campaign, rather than on the amount of work the agency does or the size of your media budget. It’s seen as a more progressive way of working that has benefits for both the agency and the client. It can be a simple as agreeing to pay the agency a fee for every acquisition the campaign generates (such as a customer registering for an account) or as significant as agreeing to pay the agency a percentage of your company’s monthly revenue. It usually works well because both parties are pulling in the same direction; the drawback for some businesses though is that the agency has to be given more control over how campaigns are run. Agencies require more control as without it they can’t maximize performance.

Pros:

• Agency and client objectives are aligned
• The agency is rewarded for suggesting new, more effective ideas and experimenting
• The sky is the limit –  because the agency is free to increase spend and generate sales without budget limitations

Cons:

• The client has to give the agency greater access to their business and their data
• Some clients feel it’s a risk to give up so much control
• Agencies are effectively incentivized to break a client’s rules to generate sales (e.g. ignoring brand guidelines, using intrusive ad placements or untrusted ad platforms)
• A client may end up paying over the odds if the agency can generate sales at a minimal cost and make a significant margin

Which is Best?

There’s been a recent shift from fixed agency fees to performance-related fees, partly to help prevent the problems outlined above and because advancements in technology make it easier than ever to track and attribute sales. Paying based on performance effectively removes the guesswork from pricing up a media campaign and ensures that the campaign is cost-effective for both parties. A fixed fee means that agencies have to estimate how much work a job will take, then try their best to stick within that. This then becomes the agency’s main worry, rather than making the campaign a success. You might be happy when you manage to negotiate an agency down on price, but this will inevitably lead to your account being understaffed (the agency has to make a profit somehow). A performance-related payment model should mean that everyone wins. The harder the agency works, the more money everyone makes.

If it was that simple though, everyone would be doing it. When media agencies talk about performance-related fees, they usually mean a revenue-sharing model where a greater degree of control is handed over to the agency. This can work fantastically for the right agency-client relationship where trust has been established, but it isn’t something you can just jump into with a new agency. There’s a significant amount of work to be done on both sides before something like this can be set up. Also, clients can think they are getting a good deal, but they are blissfully unaware that the agency is, in fact, making more per sale than the client.

For digital-savvy brands who know exactly what an acquisition is worth and are familiar with advertising costs, it makes perfect sense. If an agency can get new customers at a profitable rate, why limit the agency with a budget? But if you are a smaller company, inexperienced in digital advertising, working with a new agency, if you can’t attribute sales correctly or have strictly controlled budgets, it might not be right for you.

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Sether: The Best of Both Worlds

It doesn’t have to be a straight choice between these two payment models though. There’s another way that’s as simple to set up as a fixed-fee approach, with all the incentivization benefits of a performance-based approach. The Sether platform uses revolutionary blockchain technology to monitor your campaigns, rate your agency’s performance and pay them accordingly. Instead of giving up control, you can take full control of your campaigns. Rather than rewarding the agency over and above your budget for making more sales, Sether allows you to take the opposite approach: you set a price based on the agency hitting all your objectives and if they don’t hit them, you pay less.

It works like this: You agree to a price with your agency based on hitting your objectives, and sign off a media plan as usual. Then you feed everything into the Sether platform. While the campaign is running, you can see exactly where your budget is being spent across all platforms, which channels are performing well, which need some work, and whether your targets are being hit. When the campaign is over, Sether scores the agency on their performance according to your agreed objectives and pays them a percentage of the agreed fee. If they hit every objective, they get 100% of the fee (in effect, this is the same as a fixed fee model – the performance related payment only comes into effect if an objective wasn’t hit). If the campaign is a complete disaster, the agency doesn’t get paid.

Performance-based revenue-share models might not always be the best choice for your business, but as you have already found out, there is a way for you experience radical transparency and see precisely how and where your budget is spent and get the best out of it. Also, if you are struggling with the idea that the fixed fee context will not do your business any good, as well, luckily there’s something that will help you along the way with your endeavours to make your budget spending all worth it. So, regardless of the context, you find yourself in Sether steps in and helps you get the best out of both worlds – fixed fee and performance-based, in the sense that you can #TakeControl and you get to only pay for what it’s done. Not more, not less. So, are you ready to start using your media budget wisely?