Gini Dietrich

Value-Based Agency Compensation Models

By: Gini Dietrich | April 27, 2009 | 
42

I’m going through this process right now, trying to decide if our financial model makes sense for the future. I feel like billable hours is so archaic, but I also think we need to track time in order to be profitable. We are paid for our time so some sort of tracking mechanism is a necessary evil.

I’ve always been of the belief that you would never go into a restaurant, eat a meal, and at the end say to the chef, “That meal was fantastic – thank you so much! I’ll tell you what; if I don’t get heartburn tonight, I’ll send you a check in the morning.” So why do people always want to do that with our invoices, AFTER they’ve negotiated a program, the fees, and paid a couple of previous invoices?  Rather than be stubborn about it, though, I’m on the look-out for new ideas.

Therefore, I was interested to read “Coke Pushes Pay-for-Performance Model” in AdAge and “Changes Afoot in Professional Billing Rates” in The Australian Business.

The genesis of both articles is that clients want to know how advertising, PR, social media, marketing…all communication methods translate back to results. It’s the day old question, but now instead of shrugging our shoulders and saying, “But your brand awareness is off the charts!” we’re being held accountable for true bottom-line results.

So, you say, who determines the value? What do we do about the time it takes to ramp-up with a new client? Does this offend the PRSA Code of Ethics? Do you think we’ll try this and go back to the way things are now? Or will we do it only if forced by our clients?

About Gini Dietrich


Gini Dietrich is the founder and CEO of Arment Dietrich, an integrated marketing communications firm. She is the author of Spin Sucks, co-author of Marketing in the Round, and co-host of Inside PR. She also is the lead blogger at Spin Sucks and is the founder of Spin Sucks Pro.

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42 Comments on "Value-Based Agency Compensation Models"

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Mike Evans
7 years 3 months ago
This approach will work well for some clients some of the time. We stopped using PR firms because the first thing they would say to us would generally be “Well, none of this can be tracked and it might not work” To use your analogy, that is like going into a restaurant and the chef saying “Well, our food might be good tonight, but no guarantees” It is certainly a valid thing to say for a PR professional. Its true. But, a PR professional isn’t competing for my $$ against other PR professionals. They are competing against other marketing channels.… Read more »
Brad Farris
7 years 3 months ago
Gini: Charging by the hour must change. (see my article on the topic http://www.anchoradvisors.com/pages/article_view/22.php?aid=38 ) You are the expert, the client wants you to determine how much value your work can create. When you do that you can make more money. (And clients love to buy your confidence.) If your efforts don’t produce results, who’s fault is that? Why should the client be forced to pay for it? I know that in your business effort and results aren’t always tied in each month. Sometimes it’s a slow news day and you get lucky and other times you get pushed out… Read more »
WendyB
7 years 3 months ago

Coke’s model is an interesting one that caught my eye as well. I’m not so sure that billable hours are archaic, but they do fail to recognize value. I agree with Mike regarding PR not being very trackable or measurable and like his idea of a hybrid model.

The thing I like about Coke’s model is its focus on results.

I blogged about this today too; for more of my perspective, see: http://intouchsolutionsdigital.blogspot.com/2009/04/forcing-focus-on-results.html

Nat Slavin
7 years 3 months ago
In any professional relationship, success is often defined at the front end (the same can be said for personal relationships, too!). In most instances, the disconnect in delivering value is caused by a failure to manage expectations. What we say when talking to clients is fact, is reality. What the client hears is also just as right. The art in managing expectations is finding an agreeable mechanism to first gauge and then monitor the agreed upon expectation. So, where does value (or the price of value), fit into the client dynamic? It exists at the front end – when the… Read more »
Dave Charest
7 years 3 months ago

Interesting topic. And a lot going on in order to figure out the ‘right’ answer.

Perhaps a mix between the two extremes. Pay based on the scope of the project. Then a bonus for a successful campaign. Success of course determined by mutually agreeable terms.

But to say a provider shouldn’t be paid for their work, ridiculous.
Equally ridiculous? Producing work that isn’t trackable.

Both sides need to work to educate each other on the expectations that can or can not be achieved.

Do you think base plus bonus would work?

Thomas Scott
7 years 3 months ago

Interesting topic that many companies who hire vendors struggle with. I’m not a fan of billing by the hour myself and prefer set prices for set work. A PR release should cost a fixed amount; many functions a PR or advertising firm offers can be broken down into set prices for each project. With the rise of social media and the overlap with PR, this is going to become far more of an issue because simple retainers and bill by the hour rates just don’t make sense to businesses.

Peter Kim
7 years 3 months ago
“FOR SALE! PR CAMPAIGNS! ONLY A PENNY PER IMPRESSION!” (Just a novice opinion) The biggest question here is how to measure the success of a campaign. With major social networking sites still trying to figure out their own business model and the demise of what media USED to be, PR professionals are still looking for answers to this question. Gone are the days we could say “your story was printed in x many papers and you got x many readers” or “your television broadcast was seen by x many people” Sure we have online and print circulation, ad rates and… Read more »
Jack Monson
7 years 3 months ago

I say give it a try. If it works for a couple of clients, continue it. If it doesn’t, cut it. In “interesting times”, we’ve all got to be creative.

As far as value, I understand the concern with placing too much value on clips and impressions. However, right now, that is a starting point. As your model grows, you will gain insights on what how to better prove value.

Juli
7 years 3 months ago
I think I agree with Dave’s comment above. Why not try a mix, where you are compensated at a certain percentage (say 80%) of your regular hourly rate for the job done, time put in. Then, with the client, create a list of goals or objectives, where if they are reached, that extra 20% is then billable. If you exceed over above the set expectations, you could be compensated at a percentage over and above 100% of hourly rates. This is a model we are contemplating trying with new business. This way there is a risk/reward payoff for both parties.… Read more »
Scott Farrell
7 years 3 months ago
Gini, you raise two questions here. First, who determines value? And second, how accountable should and can communications be when it comes to bottom line results? The simple answer to the first question is that it’s the client who determines value. It’s the client’s money and the client’s business. We can say that a three-minute segment on the Today Show has value, or that propagating tens of thousands of conversations among the client’s target consumers has value (and, undeniably both do) but unless the client believes or we can show that those efforts link to a measureable business result, the… Read more »
Greg Brooks
7 years 3 months ago
Value is a function of results, yes, but it’s also a function of risk. So Juli’s point a few comments back about compensation exceeding 100% of normally billable rates isn’t an exception for this sort of model — it should be the rule. We’re odd ducks at my shop and abandoned the hourly model several years ago. Today, most of the work is done on a fixed-fee or fixed-retainer basis — quite literally, the back-of-the-napkin model started with, “OK, how do we eliminate time tracking and set up one-line invoicing as a goal?” Everything grew from that. That’s not to… Read more »
Jay Steinfeld
7 years 2 months ago

Since when did people pay for something without expecting value? Why has Google’s adwords been so successful? Because you can measure it success. It’s time for ALL businesses, not just ad agencies, to give real value.

Liz
7 years 2 months ago
This is a really interesting question, and what strikes me most is how expectations of value-based compensation vary depending on the type of service provider in question. If you pay a dry cleaner to remove a stain, and they are unable to do so, you dispute the bill… however, if you pay a surgeon to remove a tumor, and they are unable to do so… do you also dispute the bill? In some cases, probably. But it seems like the customer’s instinct is different in these two situations, and it has something to do with the fundamentally different expectations we… Read more »
Deb Evans
7 years 2 months ago

Like many others my budget for public relations, marketing, etc has been cut. I must show a return on our investment before I receive approval from our Executive Team at the proposal stage. I believe the value can be outlined by both the client and agency at the very beginning. We prefer goals, project outlines and timelines that are measurable.

Kevin Schulman
7 years 2 months ago
The hourly bill and cost plus model is broken. Peter Drucker noted as much in his Five Deadly Sins of Management – Cost plus pricing is sin #3 and it is no different conceptually from hourly bill. The supplier incentive is fundamentally misaligned with that of the client. Firms that figure this out and work with clients to align incentives will be huge winners in all this. Coke (and P&G) is willing to pay you/us more than you/we would have otherwise received if we help their business succeed (and prove it) and are willing to share the risk when we… Read more »
Luis Serpa
7 years 2 months ago
I think the main point of this whole discussion is that there are several different ways to understand “Value” in a service, so a “Value-based” pricing model will never be unique from agency to agency or client to client, and not even within the same agency and the same client. To track the value of a service, we need to consider 3 factors: 1. Trust – Trust is essential from both sides. The agency needs to trust the client and, even more, trust the client’s product being advertised or no matter how much effort is put into the message, customers… Read more »
Martin Waxman
7 years 2 months ago
I hate billable hours. (A strong statement, I know.) Yet, as an agency owner, I realize how important it is to track our staff’s time and ensure they focus on the work-to-be-done, achieve breakthrough results that provide the best value for clients and yes, even make a profit for the firm. I completely agree with you, Gini, that the current business model needs to be reexamined and I, too, am open to new ideas. I wonder if there’s merit in a two-part model that’s both project and incentive-based. Here’s how it might play out: Agency gets compensated fairly for a… Read more »
Ed Charvet
Ed Charvet
7 years 2 months ago
Gini, spot on debate, especially in this market. Something we learned. I go in part with the argument that GA and adwords give a degree of measurability, but the problem is relevance. If you do a campaign and the site shows a spike of traffic, that is good but what if they are all the “wrong type of people.” B2C PR is more difficult to measure, but still possible, but certainly B2B PR is measurable through IP address tracking. Through this route you can work out which specific organisations are responding to which specific stimulus. I recognise the limitations of… Read more »
Scott Stratten
7 years 2 months ago
I remember seeing a PR firm do this years ago (I believe Annie Jennings PR) and thought it was brilliant. Pay for results. However, the amount was really high when you did get placement but everyone know exactly what they were paying for. “Results” were in placements not in sales results, etc… since that’s how you measure PR in my books anyways, it made sense. I firmly believe in value based pricing and hourly pricing does not give any incentive for the service provider to be more efficient at something and does not take into account the value of a… Read more »
Shannon Cherry
7 years 2 months ago

You know? I threw away the old hourly billing model years ago. It doesn’t work.

I don’t know about anyone else, but a lot of my PR strategies are dreamed up when I’m not ‘on the clock.’ So how do I bill for the ideas, which is what you’re really paying for with a public relations pro? Unfortunately, it’s gotten extremely painful financially to compete with VAs and others writing press releases and sending them out.

So I’ve created packages, and my clients seem to like them.

Still, it;s all about setting and meeting client’s expectations.

Tim Jahn
7 years 2 months ago
Coming from the development world, it’s pretty straight forward – you charge per hour and at the end of the project, there’s a product to show for it. But with PR and similar methods, I don’t think that applies. It’s not one method that works or one website to show at the end. It’s a stream of ideas and actions that can achieve one goal at the end or multiple goals of varying levels of measurement. The question becomes how do you assign value to certain actions? Do you quantify and say when a certain percentage of the audience becomes… Read more »
Gabriella
7 years 2 months ago
Excellent points to consider, Gini, and great comments from everyone. This is definite food for thought. Those comments that mention “value”, however, are right on target. Especially with the written word, value seems to be a matter of perception, rather than an understandable, quantifiable amount. In my business, we do a lot of article writing; in general, it appears that there isn’t a lot of value attributed to writing in the public’s eye – or business owner’s eye, for that matter. While I can tell them that my writer spent “x” amount of time researching and writing, the result they… Read more »
Adrian @adriandayton
7 years 2 months ago

Gini,

Lawyers struggle with a very similar dilemma, and honestly something has got to give. The billable hours model is outdated, and its time to improve it. Clients want real trackable results from lawyers, PR people, and consultant in any industry should be held to that same standard.

Diane Stein
7 years 2 months ago
Hey Gini, So I have not sorted all of this out for myself. As you know from a question I asked you not too long ago, pricing and how to charge clients has been on the top of my list of things to address for quite some time now. Currently what I am looking at is putting together a flat fee package of services that includes an upfront charge, a monthly payment and then a bonus/incentive (whatever you want to call it) based on performance. The pricing takes into account the hours I know I put in, profitability for myself… Read more »
Susan Mazza
7 years 2 months ago
While I am in a different business (I am an organizational change consultant and leadership coach), I have a similar challenge. There are a lot of excellent ideas for how to structure pricing here already, so instead I’d like to touch on something that hasn’t been talked about yet. The key to getting out of the dollars for hours mode in my opinion has everything to do with the context of the relationship you create with your clients. I want to pick up something Liz said “fair billing rests on making sure the agency and the client agree on that… Read more »
adriandayton (Adrian T Dayton)
7 years 2 months ago

Great article on why the billable hour model is outdated in any industry http://tinyurl.com/cd5asn #pr #lawyer (via @ginidietrich)

Gini Dietrich
7 years 2 months ago

The responses we’ve received on this topic are fantastic! What a great forum for thinking through the financial models of ALL professional services firms, not just PR firms.

I’m taking everyone’s feedback, as well as that I received via email, and composing a pros and cons list, with potential solutions.

Stay tuned…and THANK YOU!

Matthew Confessori
7 years 2 months ago
First off, Thanks to Gini for creating such a relevant discussion. Lots of good thinking here and I agree with several users on various points. My opinion comes from the corporate client side so this type of discussion is music to my ears. Why? Because as corporate marketers in lean profit times we need to justify spending more than ever. If we don’t – it’s gone! Ad budgets are being slashed and scrutinized more than ever. Marketers are being forced to migrate toward media that can be tracked and measured all the way down to the cash register and show… Read more »
Tom Searcy
7 years 2 months ago
I think that the driving issue is precision. I recently blogged about the shift in deal conversation from “Do the same things for less money” to a willingness to consider trade-offs – http://is.gd/vqRf The trade off that I think people are seeking is precision in their spend- “I will spend more money if I know that it is going to exactly the result I am seeking.” The pay for performance approach is not so much about the variable cost rationalization of PR/Marketing expense, although I am certain that is part of it. The concern reflects a strong concern that the… Read more »
timjahn (Tim Jahn)
7 years 2 months ago

Great discussion going on over at @ginidietrich‘s blog about value based compensation: http://is.gd/vqt7

Mike Fleming
7 years 2 months ago
Gini – great idea for a post. I think everyone is struggling, or starting to, with this in one way or another. Lots of good insights here. It looks like we all agree, at least in principle, on the importance of setting expectations, value is defined by the client and the responsibility of the agency, and that times, well they are a’changing! I, too, think the billable hour should take its place in history next to Astroturf and credit default swap (CDS) valuations. I agree with Nat, Scott and Luis about the importance of establishing trust, which in our business… Read more »
Tony Vignieri
7 years 2 months ago
Here is my two cents. What is wrong with agreeing to a set amount for PR services, getting those services and then paying the bill? Seems quite academic to me. I have experienced this issue from both sides. First as being the PR practitioner providing the service to a client and more recently as being the client and employing a PR firm. When I was delivering the service at the set amount and my client would question my bill, I had to question the client and their integrity. Were they really dissatisfied with the service or where they just trying… Read more »
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[…] More thoughts on the topic from my colleague Liz Caradonna here. […]

Ben Bradley
7 years 2 months ago
My agency is in the midst of going “all in” with respect to pay for performance/pay for value compensation models. The journey has been ugly but we’re making progress by thinking about marketing success from a project management perspective. Why are projects seldom successful? Projects fail for six simple reasons: 1) Objectives are not clear 2) No measurement in place 3) Plans are too big/optimistic, scope creep 4) No accountability 5) Execution stinks 6) Static plan, dynamic world To define value, we look at each tactic individually. For example, a monthly email newsletter. We then have a conversation with the… Read more »
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