Should Marketing Agencies Only Be Paid for Performance?

We had the pleasure of interviewing an old professional colleague: Chris Stone.

Chris has 10+ years of performance marketing experience on the agency and brand side. He is currently running demand generation activities for HoneyBook, a futuristic CRM product. The question we discussed with Chris was: How should brands compensate marketing agencies?

We took the discussion further. We talked about performance marketing, exploring questions such as:

  • Has Chris heard of performance-centric contracts where agencies get 80%+ of their revenue by pre-agreed to performance goals (sales, conversions, etc)?
  • What type of company would find interest in a pure performance-based contract? Would a large enterprise, like PayPal (Chris’s former employer), agree to a performance based contract?
  • There’s more Chris and myself dove into during this discussion and you can listen to it by clicking the ‘play’ button on the SoundCloud embed below.

We also attached a lightly-edited transcript of our discussion. Read through. Let us know what you think of agency compensation structures via Twitter or Facebook.

Mike : Hello everybody. Today we have Chris Stone on the podcast. Chris is a performance marketer with a decade of search and biddable media experience. What makes his experience is Chris has worked at both agencies and brands. He’s responsible for major growth of sales activity from biddable media for brands like Virgin America, Visa, and Union Bank to a name a few of the key clients during his agency days. Since then Chris has transitioned into leading performance marketing programs at startups and enterprises such as Hipmunk, PayPal, and now HoneyBook. Chris, anything else that you would like to add in your introduction?

Chris: I’ve been doing performance marketing for a long time. It’s a unique niche of an industry. Typically, people think we’re crazy but I do feel that data-driven marketing and performance marketing is the future of where almost everything is going to go. It’s definitely not going to be an instantaneous process, and it has been moving that way for some time.

Mike : Awesome. Today we’re really going to focus on one topic. That topic is compensation for performance marketing firms or agencies. Chris you’ve been on the agency side. You’ve been on the, air quotes, client side. You’re hiring in a performance marketing firm. Let’s say you’re going to that for HoneyBook today. How would you personally draw up that contract? What key tenets or points would you want to make sure were included?

Chris: Well, the overall contract itself, there’s regular activities that need to occur. If that effectively there needs to be … You know, one aspect is, yes, I need to have personnel that are constant, that are readily available five days a week excluding holidays. We need to make sure that there’s regular weekly reporting and quarterly business reviews. Every quarter you’ll have a meeting to go over business with a planning session. We definitely pick that in from the reporting itself and the optimizations that have to be done from that, review of action items on a regular ongoing basis to understand what activities are occurring with that agency.

Then, on top of that, I probably would also want to make sure that from a compensation standpoint, if I was going to pay them, it’d probably be like only a certain percentage of the amount of money that I was spending. If I had $100,000 to spend, I’d only want to spend maybe 10% tops to manage that $100,000. Otherwise, it actually all depends on what your review model is and how much your margin, which margin you’re producing, because an agency can easily just wipe out all of the profits that you have been making with your advertising if you’re not careful.

You’ll want to make sure that there’s expertise to handle all the different types of channels you could be working with, and whether it’s search, whether it’s social media, whether it’s specific aspects of social media, whether it’s retargeting, or if it’s even display marketing and/or creative that’s going to be developed as well. Then, outside consulting for other issues that can also occur, such as instrumentation advice, instrumentation strategy, which is sort of your tag management solutions and so forth. Have all those things sort of baked in in either their own price items, or just like to have some type of general advisement from the agency and baked into the contract just to make sure that you’re covered and have the most support possible with the subject matter experts that are available.

Mike : Awesome. I’ve got a two-part question here. The first part is a yes or no answer. Talking about agency compensation, an agency offered their services to you at HoneyBook at something like a 20% of their compensation was tied to a base amount. Say their compensation was $10,000 a month. Let’s use an easy number. $2,000 a month, they got no matter what, just to keep the lights on and manage the campaigns. The other 80% of their comp was tied to actually hitting your performance goals. You come to them and say, “You know what? We need you to close through digital advertising a hundred new customers per month,” and you agree that that number is feasible, can be done with a lot of hard work. Going with the 20% base, 80% performance-based comp structure, is that something that you would be interested in or that you’ve ever seen before?

Chris: I’ve not seen it before. I would be interested in it as of from the client side, particularly because I think I could gain the goals, and be like, “Oh, yeah. We’ll give you like a prorated amount if you can hit whatever target’s on these goals here.” I’d make them pretty difficult to do, but I’d have to make sure that they are actually pretty difficult to do. I would see some ability to save money versus spending a flat 10 K with another agency. I have seen it, but not with agencies, but with my own jobs. You know, in the early days of performance marketing when I was in it, I had a very low base, and I was all comp based. If I hit my goals, I made a lot of money. If I didn’t hit my goals, I made pretty small money, like not able to survive here in San Francisco barely eating tuna and ramen.

But at age 25, I made over $100,000 a year just based off of that compensation because they gave me these goals, and I was like, “Oh, yeah. Watch me beat all of these goals.” I like it from a standpoint of like, “Hey.” What it does is it forces the agency to be hungry. They’re going to be active. They’re going to be looking for that money. There’s money on the table, but they have to work to get it.

If the goals are set in a manner that is realistic, but also difficult, that’s sort of like the ultimate sweet spot where the agency works hard, they get a lot of money, everyone benefits versus this client could game it, make it so difficult that they only get part of it. Then, it turns out it’s not being worthwhile for the agency, and so they’ll back out, or renegotiate, or they’re so easy that the client winds up paying too much in compensation and they go, “Oh, those goals were way too easy for you guys,” so there’s going to be goals going to be revised a bit where it’s like, “Okay, you can’t change the goals for like three months, or every six months, or whatever.” It’s going to be short-term contract goals, so that’s going to be require a little extra negotiation as long as both parties are okay with it, if they can find that sweet spot to ensure that there’s like that hungriness for going after performance, then I think it could work.

Mike: Now, I think that’s perfect. You know, you want achievable, but not too easy. Achievable, not impossible. You’ve got to find that middle ground. Otherwise, one party in this business transaction will just take advantage of the other.

Chris: Exactly.

Mike: Now, we’re talking more as marketers and operations guys right now. You know, you worked at PayPal. PayPal has a large procurement department. How would a procurement department react to this kind of compensation structure? Do you think it would freak them out at a company of PayPal’s size? Would it just be not-

Chris: They wouldn’t agree to it. They would just be like, “Sorry.” But if when you go into the older bureaucratic firms, even though PayPal seems new, they’ve been around since the late ’90s. They’re a very established financial firm now. You’ll probably have to work with their contract system. They’ll probably have a preset contract that’s just set for agencies that you might be able to negotiate depending on who you’re working with, but you have to have some suction on the inside in order to get that type of a deal going.

Mike: Unless you have that leverage and suction, you think at a company PayPal-size, that’d be tough to get them to agree?

Chris: Yeah. I think small to medium size, you got a shot. But those big companies where they’re like, “Sorry. We cannot process your request,” you’re going to face a lot of uphill battles in that regard. But if you know VP or senior vice president that is really into working with you guys and he’s going to push somebody over in another department to be like, “Make this go though,” then yeah, by all means it could work. You have to know a couple of the right people.

Mike: All right. Our last question talking about compensation for performance marketing. Any tip that you would want to leave the listeners with your 10 plus years of experience, you know? Is there anything when it comes to comp and performance marketing that you think doesn’t get enough attention, is never mentioned, is over mentioned? Just kind of want to give you the floor from 60 seconds and hear what you have to say.

Chris: Just for quick clarification, do you mean for personal comp or do you mean for agency comp?

Mike: Agency comp. Good clarification.

Chris: General compensation is like there’s been a trend where people will often … There’s a lot of clients out there. There’s small. There’s super small. There’s medium sized. There’s big clients. You have to price things correctly in order to be competitive in the market, but there’s so many player right now, so many agencies out there. Some of them are worth their salt, some of them are not. The ones that are not will eventually go away. Don’t worry. The ones that are doing well, like MKG, you know, there’s a reason, you know? But it’s also based off how do you price your clients correctly. You have to do it based off of good amount of research, and to like, “Hey, how does your revenue model work? How much money are you guys making? Do you guys have money in the bank? Are you profitable? Are you not profitable?”

Just sort of gauge the situation and go, “Hey, this is what we think you guys can afford. This is what we think we can provide your business and benefit. We can actually maintain our relationship here, be a positive influence on your business, become the … “ Effectively, the way, in my opinion, to position the marketing agency fees is, you know, hey, instead of having to deal with hiring three or four people to manage all of your stuff, be full-time, and then deal with turnover in that department, and how do you grow that department, and dealing with all the investment it takes from there and brand, you can get going right from the get-go, have a team of experts that have been doing this for years. You have no questions about how to hire, who to hire. Leave that all onto the agency.

Sort of go, “Hey, this is how we want to position my agency fees.” It’s effectively two parts. It’s, you know, will this benefit their business and by how much, and then, how much labor resources are going to be saved in this overall process. But based off of that, usually you can negotiate and sort of see what that’s like. I do feel that if agencies got paid more money, they would feel more comfortable allocating more resources to each client. I do think clients should probably pay more money overall for what agencies are able to do. Otherwise, it turns into lower service to counts that doesn’t make the client happy, doesn’t make the agency happy, but that’s the way the economics work out.

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