Performance-based marketing: when agencies take on more risk and clients stop paying for waste

The relationship between a marketing agency and its client can be a complicated one. Clients want envelope-pushing creative, genius media buys and an immediate increase in sales after the launch of a campaign – and they want it at a bargain price. Agencies, on the other hand, have to invest an enormous amount of resources in the on-boarding and pitching process, and can be shut out by clients who don’t feel that the agency has their best interests at heart. This traditional agency-client model with all its flaws is, in a word, outdated.

The current alternative to this traditional mode of advertising is performance marketing, in which the client only pays according to key performance indicators, once they are met. This solution benefits both the agency and client side of the relationship. The agency sees higher returns on its efforts and clients take on less risk and feel more camaraderie with the team they’ve hired.

By looking more closely at both sides of the marketing equation, my conclusion is that 2018 will be the year that both clients and agencies make the switch to this more efficient model and ‘trim the fat’ of antiquated business models.

For the clients

There are numerous benefits to a performance model outside of the most obvious – only paying for results. The most important being that it transforms the client-agency relationship that can often be icy into a real relationship based on shared goals.

Complex KPIs, such as install coupled with specific in-app spend, prove to clients that the goal isn’t just an increase in overall traffic, but an increase in the overall quality of the traffic, offering everyone – clients, customers and marketers – a winning solution.  In practice, these kind of KPIs have tangible success and earn definite successes across verticals.

Performance marketers invest their own dollars in the marketing budget, offering the client a clear picture that the marketing company is financially invested in the client’s success, adding a level of trust on both sides, not to mention offsetting the financial risk that the client is taking on. The mutual understanding of that risk makes the working relationship more open – encouraging better creative and smarter strategising.

The creative teams in marketing companies are more willing to take risks when they know they don’t have to meet the specific tastes of a client and are able to focus on creative that will resonate with or push the audience to engage.

This partnership, based on performance, also has a much higher return on investment for the client, since high quality traffic brings users with a higher lifetime value (LTV), leading to increased revenues. Clients pay only after the desired results are achieved, avoiding wasted time – or worse, budget – on various business decisions, like whether to switch agencies.

For performance-based marketing

Performance marketers avoid becoming just another business-for-hire that could easily be swapped with another firm if the client is not satisfied with the work or simply wants to go in another direction.

The optimised performance-based marketing model allows marketing companies to grow their expertise in particular industries, in specific products and in certain regions or demographic targets.

As marketers have demonstrable success and become experts in an industry, clients are able to place more weight and trust in the marketing company’s guidance. As a marketing company gains expertise, it also begins to speak the same technical ‘language’ as its clients, adding another layer of commonality and ease to the relationship.

Being paid solely for performance can be a gamble, but as they say, ‘high risk, high reward’. In a traditional agency-based business, typical profit margins are about 15%. Performance-based marketing models, on the other hand, offer agencies margins of as much as 50% (less marketing costs) for the exact same work! Reviewing the numbers alone is cause enough to switch to this mode of business, not to mention the cultural benefits of switching to this model.

Another benefit? The nature of this deal makes it critical for agencies to focus on all aspects of their campaign from beginning to end – to the victor goes the spoils.

But remember risk

It is important to remember that this strategy does involve taking on more risks and each marketing company needs to plan accordingly, building a business model that is able to endure financial setbacks, incur losses and has the resources to reinvest its capital back into campaigns. The shift to performance-based marketing does not have to be instantaneous, instead cautiously increasing digital spend as marketing companies learn the ins and outs of the model, without jumping into a freezing cold pool and needlessly throwing money away. Companies further need to ensure their marketing professionals have made the shift in mindset, from spending more to get more to a more nimble and savvy approach to eke the most ROI out of every campaign.

Given the ever-changing digital marketing industry that complements the seemingly hourly changes in digital media, transitioning to a performance-based marketing model is an important step, both for clients and marketing agencies. Tracking revenue resulting from a specific user or campaign is the wave of the future, and a growing trend that we will see in the coming year.

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