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Output Pricing – Friend or Foe?

“The problem with commissions is they drive all the wrong behaviours, but FTE-based fees are a pain in the arse to manage”. So said a very frustrated Global CMO who like so many of his international and local peers, was bemoaning the energy-draining effort required to negotiate fees, and the woeful bluntness of the ‘tried & tested’ but now failing commission system.

FTE-based fees rely on agency personnel accurately completing timesheets (a triumph of hope over experience), whereas commissions bear absolutely no relation to effort or value and worryingly for clients, so both are lacking sufficient levels of transparency and accountability.

Performance based remuneration schemes, when properly calibrated to relevant outcomes and underpinned by unambiguous methodologies, can help drive appropriate behaviours and lead to improved performance levels, as well as healthier relationships. However, typically they only account for around 25% of total remuneration (compensation), leaving the remaining 75% still to be sorted!

The increasing use of more flexible, project-based fees (as opposed to long-term retainers), still encounter the same challenges, i.e. how to build up a payment structure for services without creating administrative overload.

Friend or foe?

So, is output pricing the answer? While gaining traction in the creative space, the practice has had less adoption in the media world, but I would argue is just as relevant, albeit potentially more complex to achieve. This complexity derives from the multiple layers of services that constitute an output, and the temporal element where an output can stretch out over a long period of time, e.g. always on SEM.

For output-based pricing to become more acceptable, both client and agency need to overcome a couple of hurdles:

Firstly, they must define and agree the units of output, e.g. a strategic plan, a competitive report, a programmatic buy, etc. and to reach that agreement, the units need to be granular, scalable, measurable and timeboxed . Defining the units and aligning them to the client’s current and future requirements is complex and time consuming but ultimately rewarding, in that both parties can then buy or sell units without the incessant haggling, which often leads to the frustration and mistrust that seems to be endemic within our industry at this time.

Secondly, both parties must accept a level of risk. For agencies, they need to accurately, transparently and competitively determine the price per agreed unit of service and hold that price for a fixed period. For clients, they need to accept that an agency’s profit will be largely be earned by delivering the unit of service more efficiently, without compromising the quality of services.

MediaSense is investigating this approach with a number of our clients and having gone down several cul-de-sacs, we think there are five key areas to be aware of:

1 – The more precise the definition, the clearer the deliverable

2 – The smaller the unit, the more transparent the price

3 – Address contract clauses if efficiency gains are part of the agency’s KPIs

4 – Performance-based remuneration is an important compliment to any output-based pricing model

5 – Aligning unit definitions across agencies facilitates comparability and flexible operating models

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