Posted by on 26th July 2017

By Andre Steenekamp

Background

Traditionally, Search Engine Marketing  (PPC) was charged out at a flat fee of 20% on gross media spend. This worked well for years until the traditional ATL media agencies, like The Media Shop, et al, realised that online media was not a fad and more of their big ATL budget was being apportioned to online advertising, so best they got a slice of the action. They were comfortably charging a low percentage fee of media spend in the ATL world, where TV, Radio and Print budgets for large corporates was in the hundreds of millions. So, 4% of a large corporate’s R600 million budget still rakes in R2,4 million for the agency before charge out resources like strategy and media planning.

This fee structure initially placed a lot of strain on the online media agencies as traditional agencies were passing the same fee percentages onto clients’ online budgets as a) they did not understand the amount of resource hours that went into online campaign management (as opposed to their traditional model of strategy – plan – buy – <campaign runs for 6 – 12 months> third party report back) and b) they used ATL spend to bankroll online to hold on to the account while they hauled out the chequebook to acquire an online agency / resources.  This took online media back 10 years as their campaigns were quite rudimentary to align with traditional media metrics and campaign success measures reverted to impressions and clicks.

However, with the re-emergence of SEO over the last few years, the pendulum has swung back in favour of the full service digital agency as traditional agencies have little to no competence in this area. Brands can no longer rely on an either / or (SEO or SEM) strategy as the fight for relevance and the level of competition meant that both were required.

The Challenge

The challenge is two-fold; firstly, traditional agencies and clients alike have driven hard the benefits of a  single agency / one stop shop model and, clients have begun to question online agency remuneration.

Every agency commercial manager / MD wants a larger slice of the clients budget and is always (or should be) pressing client service to seek out and quote on opportunities outside of their scope of work. This land grab started the ‘we can do anything’ attitude and the emergence of the one stop shop approach.

Large clients have also, to some extent, promoted this from their side as marketing status meeting attendees struggle to fit into even the largest of client boardrooms. So they want a lead agency approach, with the lead agency driving strategy and managing the supply chain.  This has further boosted the land grab and side-lined many niche service agencies.

The other challenge is to find a remuneration model that fits the clients established mind-set and budget, whilst providing fair and profitable compensation for the time, skills and experience required for the online agency to perform at their optimal ability.

The Opportunity

The one thing that traditional agencies still shy away from is true measurability. The opportunity is to measure everything and present an integrated online offering where SEO, reported through Google Analytics and on-site goals, is combined with target driven and measured paid search advertising. Crucial to this model is the ability to create and edit campaign landing pages.  At the centre of this ‘hub’ is the strategist, who crafts, reviews and tweaks the strategy and ensures this is implemented across all platforms and channels.

More and more, brand owners are looking for a digitally led strategy as mobile phones move from 2nd screen status to primary screen for brand and product engagement.  Instead of being the last thought in the campaign roll-out, online media should be the first consideration and all traditional media should be driving the target market to their online devices, instead of the non-measurable “feet in-store” model of the past.

So how do we pay the modern performance driven agency?  The preferred remuneration method of sophisticated clients and agencies is a Cost Per Action (CPA) model.  An outcome is agreed – a Lead, Acquisition or Sale / Transaction in the e-commerce space – with an agreed cost range to reach this outcome (CPL, CPA, CPS, etc.). Using either historical data or by running a series of test campaigns, an acceptable CPA range is agreed.  If the agency remains in or below this range, they are either paid an agreed fee or share in the revenue generated by the conversion.

Again, there are several options on this model:

  • Retainer plus (an at risk) performance bonus
  • Retainer plus sliding scale share of revenue
  • Share of revenue only

This model incentivises the agency to perform well as any outcome that reaches and exceeds the agreed target drives additional revenue for the agency.

Having said all of this, there are almost as many fee models as there are agencies.  The tricky part comes in the pitch process as this can sometimes determine whether an agency wins or loses a pitch, and very often this decision is made without the agency in the room to defend their proposed model.. In this case, it is prudent to always propose two models in every pitch scenario so that the client gets up front that the agency is flexible and willing to negotiate.

In the end, we all want a fair value exchange where both parties feel they have the best deal.

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