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Gini Dietrich

Performance-Based Pricing in a Billable Hours Industry

By: Gini Dietrich | September 4, 2012 | 
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A few weeks ago, I met a really interesting business owner.

He has built a company that does more than marketing communications. They also do packaging and point-of-purchase and sales.

A full-on marketing firm that also does something pretty fascinating: Performance-based pricing.

Of course, I was a little skeptical (and very curious) to hear this. After all, when people in our industry charge for performance, it typically means they get paid based on number of impressions, which are totally easy to game.

Put something on BusinessWire and watch the impressions come in. You don’t have to do any work and the perception is it’s been picked up all over the place, including USA Today and Yahoo!

Of course, if you go to those sites (or pick up the paper), you never find the story because it’s buried deep in some spot people don’t actually read, but to an unsuspecting business owner, it looks like you’re doing your job…and they’re more than happy to pay the bill.

What doesn’t happen, though, is the phone doesn’t ring. There isn’t the publicity effect we perceive will happen when we’re all over the news. No one comes in or calls or visits or buys.

So the performance-based pricing sits very poorly with the organization’s leaders because, while it looks like the job was done, they were focused on the wrong things.

Teen Titan

I was reminded of the conversation I had with this business owner about performance-based pricing (and how they do it ethically) when I read “Teen Titan” in the September 3 issue of The New Yorker.

The story is about Scooter Braun, the manager of Justin Beiber, Carly Rae Jepsen, and others, and how he built a teen star out of nothing.

It’s a pretty interesting article; one I recommend you read even if you’re not interested in performance-based pricing because it’s also one of entrepreneurship, the school of hard knocks, and the American dream.

In the article, it describes how Braun discovered Beiber on YouTube, convinced his mom to move Justin to Atlanta (where he paid for their home, furniture, and other expenses) in order to begin to build his following on YouTube and the, eventually, get him in front of music executives.

It also describes how Braun is bringing new talent into a dying industry…or one he describes as changing through licensing, merchandising, and digital sales.

Sound familiar?

What I found most interesting about Braun’s story is how he gets paid. He takes a standard management fee of 15 to 20 percent, but he also takes a cut of all revenues, including ticket sales and merchandising.

Performance-Based Pricing

For the past couple of years, we have been meticulous in working with our clients to deliver results that drive real business success.

Many of you have probably heard me say we drive to one of three things (or a combination of them): Increased revenues, improved margins, or a shortened sales cycle.

For one client last year, we generated $2.2 million in new revenue…and our annual budget was unchanged this year.

So I’ve been thinking a lot about performance-based pricing or taking a cue from the music industry.

What if we were able to get a cut of the revenues we create on behalf of clients?

Of course, there are a lot of variables, but I think it can be done. Not only does this potentially make us more money, it creates a true partnership with our clients. We’re taking risk. We’re putting skin in the game. And, if successful, we win with them.

What do you think? Can it be done in an industry that is notorious for billable hours and retainers?

About Gini Dietrich


Gini Dietrich is the founder and CEO of Arment Dietrich, a Chicago-based integrated marketing communications firm. She is the lead blogger here at Spin Sucks and is the founder of Spin Sucks Pro. She is the co-author of Marketing in the Round and co-host of Inside PR. Her second book, Spin Sucks, is available now.

100 comments
Sandy Malloy
Sandy Malloy

Great post!  As part of Business Wire's measurement team I should thank you for mentioning us (though if I were scoring sentiment.....<smile>)    I'm offering my own personal opinion here (not speaking for Business Wire) and  I have to agree with Dan Gershenson that to make this work you have to be crystal clear about what constitutes "performance."   I'd be the first to say that even noting the # of viewers of press releases, while a much better measure than impressions or placements, is only part of a communicator's or marketer's total strategy.   As far as compensation goes, though, I feel that if creating press releases or writing advertising copy or producing any other "outputs" are part of the job you are doing for your client, I would want to be directly compensated for those duties.  That fee can be hourly or flat.

 

Beyond that, I believe it is perfectly legitimate to negotiate a contract with your client that spells out achievable, measurable goals tied to business objectives and what you expect to get paid for achieving or surpassing those goals.  As many others have said, you'd also need to incorporate specifics of what the client is expected to do.

 

Of course, the hardest part is all the measurement that needs to be done to figure out the portion of the clients's success for which you're responsible.   Probably one reason some practitioners will do something easier.

JCMorganKreidel
JCMorganKreidel

Fascinating conversation overall.  Like others, I'd say there's definitely opportunity.  And isn't that what we're all looking for: NEW opportunity.  I think I find it easier to accept it, as a theory, because I'm in government contracting -- very often we see solicitations where a incentivized fee is add to reward performance.  Usually has more to do with delivering early or under budget, but they're out there.  Still, I understand why you, Gini, might have hesitation and I don't disagree.  Because so many others out there are just in it to make a buck, the rest of us still may avoid some opportunities if only to avoid being painted with the same charlatan brush.  It's good to be cautious, it's even good to turn down things to protect what's most important -- your credibility.  Good blog -- you've given me something to ruminate over ...

barrettrossie
barrettrossie

Great topic Gini, and great comments below. My appreciation to all. 

ginidietrich
ginidietrich

@ericamallison I certainly don't have all the answers yet...but we're working on it!

Danny Brown
Danny Brown

It's something I wrote about back in 2008:

 

http://dannybrown.me/2008/11/25/drop-the-retainer-if-you-want-to-retain/

 

It does seem that the retainer-based model is coming to an end (or needs to). After all, where's the hunger to succeed if you're being paid regardless of results? That's a scenario for shady agencies and businesses to thrive in.

 

Though i will say, you guys are worth every penny. :)

rustyspeidel
rustyspeidel

I think, like the music biz model, it takes a base fee plus points for measurable contributions to revenue. Discount the base to put skin in, but take an upside.

TonyBennett
TonyBennett

Hell yeah it can be done... It's done in many financial service fields. Heck, it's how I get paid, but only a fraction of the revenue comes my way (but hey, I don't own any of the risk they say). How sweet would it be to build-in a revenue stream from work you've already performed? That's marketing in sphere, Gini!

Cision NA
Cision NA

Very thought-provoking and a great topic for discussion for the industry as a whole. I received a release from Ginny Grimsley/Penny Carnathan in August that discussed this same idea and outlined a "grid" system: "[We] set prices according to the placements EMSI obtained. For instance, when the agency got a client mentioned in a newspaper, he paid based on variables such as the paper’s size and the extent of the mention."

 

This started to pose a problem, as some clients didn't have the budget to support their placements, so it seems like your option would leave less room for client frustration. 

 

Out of curiosity, would lead tracking be an issue? Would you only count revenue that could be tracked back to you (a mention or a link from a release that leads to a sale) or would all revenue during a certain time-period be counted toward the percentage your company receives?

 

We shared this article with our clients as it is something that needs to be discussed and they need to be aware of. Thank you for sharing :) We look forward to seeing where this leads you!

 

Best,

Lisa

jacobstoller
jacobstoller

I think we need to make a distinction between "performance based" and "results based".  I can do a great job for my client, but because the company didn't execute effectively, or had problems in their customer base, the results may be lacking.  If results, for which we have limited control, are the metric, this is really about a co-investment.

Howie Goldfarb
Howie Goldfarb

Very hard for marketing/pr/advertising to connect cause and affect. I can see being paid based on leads generated then converted that can be clearly linked to the work one does. This is the problem for many businesses.

 

If I go into a store and buy something was it an impulse buy? Did I see from a Sunday circular? Did I research online? Did my friend tell me about it? But if one group is in charge of all that they don't care because they get credit for the sales. And this is easier for a small business than a big one because big ones need various inputs.

 

On that note Coke and a few big brands have been trying to force pay for performance on the major ad agencies and media buyers. Starcom MediaVest has also been trying to push this on the media outlets they buy media from. It gets really messy. Why did the effort fail? Crappy product? Poor price points? Bad creative? Bad media buy? Bad media planning? Better competition? Why did it succeed? everyone wants credit.

KensViews
KensViews

Thought-provoking post, Gini. Questions it raises (among others) 1) How much risk will the agency take? What if its advice is followed but the results aren't there? How much does the agency get paid, if anything; 2) Clients are so involved in success. When they change/weaken the agency's "work product" before it's released, as happens to many agencies, this can reduce impact and results. Are agencies willing to risk this? Or in this kind of approach, is it "We'll take the risk if you implement exactly what we recommend.  If it doesn't pan out as we predict, we'll take a lot less compensation."  But are clients really willing to "let go"?  

Joshua Wilner/A Writer Writes
Joshua Wilner/A Writer Writes

I go back and forth about this. It sounds great but there are an awful lot of variables that impact things. It reminds me of when I sold online ad space and my clients wanted to pay based upon performance.

 

It put almost all of the power in the client's hands. They were tracking all of the post click activity. I had no control over their sales force so I might provide 100 qualified leads and have none of them convert because they had bad sales people.

 

Sometimes the numbers would show a discrepancy between how many people we sent and how many they said they received. It was never in our favor.

 

Perhaps that was always correct and they were always honest, but what if they weren't or what happened if they were sloppy book keepers.

 

What about the time factor. What happens when someone learns about the client in December but doesn't choose to sign up to purchase their product/service for another six months or more. They learned about the company because of your efforts but you don't get credit.

 

Sometimes it drove me nuts because I could bust my ass and know that I did a great job but it just didn't matter and I earned bubkis for it.

 

Our time is worth something.

 

 

ginidietrich
ginidietrich moderator

 @Sandy Malloy Ha! Sorry Sandy...I didn't mean it as an affront to BusinessWire. We're customers - we love you guys! I only meant it as an example of how shoddy PR "pros" use the stories that get picked up from your service and count that as all the hard work they did. Unsuspecting clients don't know that stuff is automated so it's not really fair to get paid for "results" based on that.

ginidietrich
ginidietrich moderator

 @JCMorganKreidel And I think your point about new opportunities is a good one. I don't know that you can make it work with new opportunities. I think you have to already have a good working knowledge before you can find ways to make something like this really be effective.

Latest blog post: #FollowFriday: Barrett Rossie

ginidietrich
ginidietrich moderator

 @Danny Brown The problem is, particularly with us, not every client would be willing to do this...and I also don't think it's the right model for every organization. But I do think there is something here. I may have you think it through some more with me.

ginidietrich
ginidietrich moderator

 @Lisa Larranaga We don't do any media relations (or, if we do, it's very rare and only part of a bigger campaign) so ours is less about stories/ink and more about real results. For instance, the client I mention in the blog post, we do PPC, SEO, email marketing, content, advertising, a bit of trade media relations, video, and trade shows. We know exactly which part of the campaign was the first touch, which part created the need, and which part sold. Their revenues are in the hundreds of millions so our measly $2.2MM is nothing, compared to what their sales teams are doing, but it's more than paying for us and providing an opportunity that the sales guys never have to make cold calls. We're very good at tracking results, from this perspective, and I think it'd be interesting to get a piece of what we help them achieve (it looks like we may double it this year).

ginidietrich
ginidietrich moderator

 @jacobstoller Totally agree with you. That's why I think it has to be for existing clients where you're already doing great work. I don't think I'd do it for a new client because there are too many variables - what if our day-to-day person leaves or what if the CEO decides to spend the profit on a Ferrari (that actually happened to us and we were held to profitability goals). So you really have to be part of the business, every day, to make it work.

ginidietrich
ginidietrich moderator

 @HowieG I think the difference is you're talking consumer and I'm talking B2B. It's MUCH easier for me to cause someone to buy from marketing because I know where the customer came from, I know what got them there, and I know how much they bought. For a consumer business, your point is on target.

barrettrossie
barrettrossie

 @HowieG The Martin Agency thrives on performance for their ads for Geico and FreeCreditReport.com. I'm not sure how it affects their compensation. But the direct response nature of the work gives them tons of cred with their clients and in new business pitches. 

ginidietrich
ginidietrich moderator

 @KensViews This is the way I'm looking at it: We get paid what I would call our expenses. So I have to know exactly how much it's going to cost to do something. But we don't make any money unless we achieve results for the client, which are agreed upon after a trial period (maybe it's 90 days, maybe it's a year) where we do the research, we develop the strategy, and we outline the plan. There also are benchmarks every week and every month that are agreed upon. If we're not reaching benchmarks, it's either because we did something wrong in the analysis and research or the client isn't cooperating. The contract could be written in a way that, if it's the latter, we get what we would have charged without a percentage of the revenues created. Like I said to Jacob above, it may only work with existing clients.

ginidietrich
ginidietrich moderator

 @thejoshuawilner I think it has to be an existing client and it has to be a client that already trusts you to do your job. The client I mention in the blog post is a perfect example of this. They trust us, take our recommendations, and follow our advice. And we'll generate close to $4MM in new business for them this year. Why wouldn't I want to take the risk of charging them less in retainer in order to get a piece of that?

TonyBennett
TonyBennett

@ginidietrich well maybe you should stretch the imagination and be a trendsetter... After all, Augusta let two women into the Masters club. If they can change, anyone can! And, I also think that people are products. I mean you are what a communications pro looks like, after all!

Keena Lykins
Keena Lykins

 @ginidietrich  @Lisa Larranaga I've been trying to figure out for years how to tie marketing communications and PR to the bottom line, and while it can be done, I've yet to have a client willing to tie the whole spectrum together, as yours have, or be willing to pay for the research to ID the touch points that yield results. Frankly, I think for many, it would be cheaper to keep going as we are than re-align their structure or pay for research.

Cision NA
Cision NA

 @ginidietrich  Hi there, Gini! It does seem like it would be much easier to track if you can attribute "real results," and especially if tracking results is simple. And give yourself a big pat on the back - $2.2MM is still something to write home about! :) I look forward to seeing where you take this in 2013 and beyond.

 

Best,

Lisa

jacobstoller
jacobstoller

 @ginidietrich If you have effectively co-invested in your client's results, you are, to some degree, a stakeholder in your client's business.  The guy (I'm assuming a gal would never do this!) who bought the Ferrari was, in principle, a violation of his fiduciary obligations to you.  (I assume you can't sue him, though.) The term "pay for performance" was, in this case, a euphemism that served his purposes.  So.....maybe we should be careful about using that phrase.

Howie Goldfarb
Howie Goldfarb

 @ginidietrich I agree. It is also why usually the biggest force for B2B is the sales team. My last sales gig there was no more than a handful of companies that could use my service in every major city. Maybe 100 in the western third of the US with really only 50 to be focused on.

 

BUT marketing did try helping. They paid for lead generation. And where I think an A-D would of excelled is improving lead quality. Ours sucked. For every 50 leads one would be reasonable quality. And often it was hard for me to penetrate companies that might have 2000 workers on site and I have about 20 I have to reach through security (sometimes military security). Yet one good lead via A-D could reap 100K's and 1mil+ programs per year.

barrettrossie
barrettrossie

 @ginidietrich  @HowieG Agree absolutely on B2B. Howie brought up Coke and other big brands, so my point is REALLY on target. ;)   

 

Overall, I'd like to get paid a project fee based on the factors you (Gini) mentioned elsewhere, and a bonus for meeting or surpassing clearly established goals. (I'm just thinking out loud here, and I have NO experience in this area.) 

Joshua Wilner/A Writer Writes
Joshua Wilner/A Writer Writes

 @ginidietrich  I have a friend who had the opportunity to do work for a client based upon a flat rate or a portion of the proceeds.

The first time they worked together that portion of the proceeds would have come from several million dollars but since they were new he opted for the flat rate.

Had he gone for the percentage the gross on that one account would have accounted for 90% of everything he brought in the entire year.

 

Second time around he figures he is not going to miss out on an opportunity so he opts for percentage. He works like a dog an goes nuts providing extra services but things don't work out the same way.

 

Why?

 

A change of personnel on the client side meant that someone didn't pay attention to the leads and business that came from his work so when it came time to pay they ended up fighting about how much he really deserved.

 

So I agree with you about the potential upside and the need to work with a client you know well, but I also think if you don't have all responsibilities mapped out...

KensViews
KensViews

 @ginidietrich  That's  @Danny Brown , isn't it?  (I didn't want to announce this publicly, but he's asked that all communications between you filter through me)

ginidietrich
ginidietrich moderator

 @Keena Lykins Unfortunately, I agree with you. It probably is cheaper to stay the same than change...at least in the short term. I don't see this working for every client. But I do think it can work for some that already treat you like a partner in their business.

Howie Goldfarb
Howie Goldfarb

 @Keena Lykins  @ginidietrich  @Lisa Larranaga in my comment I mentioned business size (need to follow up and make sure) it is easier if you aren't one of many agencies all working towards a common goal.

 

But I would bet in Gini's case study she has buy in from the top. I never was a believer in selling to silo heads. Vs company heads. I would rather get buy in from the CEO than the CMO or VP of Sales. The main reasons are vision and patience. In a healthy company the CEO will have both so your strategy can be given proper time to pay off. And from the top there would be less fighting for recognition and more support for the bottom line.

ginidietrich
ginidietrich moderator

 @HowieG We're actually going through this with a client right now. They're spending a lot of money advertising in buyer's guides because it looks like they're getting a lot of leads from them. But, as we began to dissect those leads, we discovered only 25 (out of thousands) were warm leads and only one was a real lead. One. The ROI on that is terrible so we're reevaluating where they put their money in 2013.

Howie Goldfarb
Howie Goldfarb

 @barrettrossie  @ginidietrich Hey Barrett funny you bring up Geico. Their marketing is brilliant. Everyone knows give me 15 minutes I can save you 15% on car insurance. They pay for that with massive media buy to go with the creative side. I use them as an example (with say cheap beer commercials like Budweiser spots) that if I find funny I will watch over and over yet not spend a dime.

 

But Geico is not an impulse buy and they just want you calling when it is time to re-up or you get a new car. What I always found curious is zero mention of if Geico sucks handling claims. Usually low cost providers give you service to match. They have to in order to keep their prices low.

KensViews
KensViews

 @barrettrossie  @ginidietrich  I actually left the practice of agency PR to become a consultant and trainer to PR firms. Many are dealing with the issue Gini outlined here. Few have found the magic sauce to make it work, at least yet. They know the problem: that by  billing merely by hours, they're not getting full credit for the impact that they have on their clients' business. It''s determining the balance between appropriate risk and reward that's so tough to figure out.

DavidOates
DavidOates

 @thejoshuawilner Agree with you there. It's why we do as much due diligence on our prospects as they're doing on us. For every one we take on, we decline two.

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  2. […] from corporate to agency life really showed me how different they are – and it’s not just billable hours, managing multiple accounts, being responsive at all times of the day and night, and client […]

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