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Some ad agencies get paid by results

Marketplace Staff Nov 27, 2009

Some ad agencies get paid by results

Marketplace Staff Nov 27, 2009


Steve Chiotakis: You know, advertising revenues have been hit pretty hard in this economic downturn. Spending reportedly is down more than 10 percent. But that’s not the only bad news on Madison Avenue. A growing number of clients want to withhold some pay from ad agencies unless their marketing campaigns work. Lilly Fowler explains.

Lilly Fowler: Procter and Gamble is the world’s biggest advertiser. Last year, the company spent close to $8 billion hawking everything from Pampers to Swiffer mops. So when P&G decided it wanted to change the way it pays for advertising, it put Madison Avenue on notice.

Richard Delcore: We’re going to pay them for good work. And we’re going to reward them with extra compensation if the brand grows and they perform well.

Richard Delcore is P&G’s finance director. He says the company used to pay ad agencies based on how many hours they worked, a measurement called “billable hours.”

But now, P&G is switching to a payment system based on performance. In place of billable hours, P&G pays a flat fee and offers back-end performance bonuses if an agency’s ad campaign boosts sales.

The bonus is around 10 percent of all new sales. P&G has these performance deals for more than 70 of its largest brands.

Swiffer Ad: Once you switch to Swiffer sweeper vac . . .

P&G isn’t the only big advertiser making a change. Coke says it will cover an ad agency’s cost to create a campaign. If the campaign pays off in higher sales, the agency gets up to a 30 percent bonus.

Ron Baker is founder of the Verasage Institute, a think-tank dedicated to doing away with the billable hour.

Ron Baker: It’s holding the agency to account for results, whereas under the billable hour, it was just, “hey, I spent the time.”

But the performance-based system comes at a tough time. The auto and retail sectors have slashed marketing budgets, and ad agencies have cut tens of thousands of jobs. And this new way of doing business could hit smaller agencies especially hard.

Steve Koskela is chief financial officer for Ground Zero, an ad agency in Los Angeles:

Steve Koskela: Nobody’s in this business to work for nothing. And I would argue the problem with putting such an emphasis on results, where 100 percent of the agency’s profit is locked into certain results achievement, is it assumes that the agency has control of all the variables to determine success. That couldn’t be further from the truth.

Like what if the product is poorly made, or if its price is too high?

Koskela: The agency gets punished for it?

Koskela thinks agencies and companies should agree on a fair price for their services. And leave it at that.

I’m Lilly Fowler for Marketplace.

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