In the advertising sector, there's often talk about partnerships between agencies and clients. However, most payment methods don't actually support this idea. But what is the difference? And what impact does this have on remuneration?
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'Supplier / n.: a person or organisation that provides something needed such as a product or service.' Many advertisers and their procurement executives take this buyer/supplier view on agencies, providing necessary services like creating and executing advertising plans.
'Partnership / n. : a formal relationship by two or more parties to manage and operate a business and share its profits.' The key point here is they share the risks and the profits.
Let's explore typical payment models and see if they reflect a supplier or partnership dynamic:
Media Commissions & Service Fees: Clients pay based on the volume of media or services bought, rather than the quality of work. This reflects a supplier relationship.
Retainer and / or Project Fee: Clients pay a set fee for each service or project, focusing on buying human resources. While it helps with budgeting, it overlooks the value agencies bring and doesn't adjust for performance.
Value Based Remuneration: Payment is based on the value agencies deliver, setting a price for outputs and offering bonuses for successful outcomes. This aligns more with a partnership, but setting prices and agreeing on outcomes can be challenging.
Performance Based Remuneration: Agencies are incentivised based on performance measures, such as sales or brand awareness. While this aligns incentives, it can be complex to manage and agree on measures.
True partnership behavior involves agencies sharing risks and rewards:
Agencies put their profit at risk based on performance.
Profits are tied to client success.
Agencies invest resources and time into client success.
Advertisers share profit
In conclusion, not all clients want a partner; some prefer a supplier. Payment should either cover costs with a fair profit for suppliers or reward partners for the value they bring. Advertisers and agencies must align on the type of relationship they want and tailor payment models accordingly, rather than just paying lip service.
We have had years of experience in developing customized remuneration models based on industry benchmarks and best practice. But in most cases the primary driver for the marketer and procurement is trying to deliver transparency and accountability to ultimately reduce costs, not necessarily build sustainable relationships. In other words they see their agencies as suppliers.
What kind of relationship do you have with your agencies?