What happens when you’ve done your analysis, aligned your marketing campaign with the client’s needs, outlined a roadmap and received buy-in, then price negotiation arrives and the client asks for a performance contract?
During my almost decade career in digital marketing, I’ve worked on a lot of marketing deals. Having a deep understanding of the industry and some consultative selling experience has always made a recipe for success. Performance contracts typically stipulate the marketing agency will get paid based on how well it performs and what results it is able to deliver. They come in all shapes and sizes and can be tiered out to drive success or very black and white and the numbers must be hit or exceeded. Like most models, they are not always perfect and you will find both pros and cons with each.
Performance Marketing Pros
For the client, performance marketing is usually a no-brainer because they can set a bar of performance that they know will drive major goals within their marketing campaign. For most clients, this model is typically very appealing. If the agency doesn’t hit the goal it gets paid less, if the agency meets the goal you get paid a fair agency rate, and if the agency exceeds the goal it should get paid well above the average agency rate and share in the profits with the client (depending on how the performance marketing agreement was developed).
On the agency side, there are a few advantages. If you are a smaller agency going up against a big agency, this could be a tactic to push the decision making in your favor by having more skin in the game. It shows you are hungry and will do what it takes to perform.
It is also a way to build a strong rapport with the client. Showing you are invested in their business and the performance of their marketing campaign sends strong signals as a partner and will help solidify trust right off the bat.
Performance Marketing Cons
Compared to retainer marketing campaigns, there are plenty of flaws with performance marketing campaigns. From my personal dealing with performance marketing campaigns, I have not had a successful long-term relationship with the client. When I have entered performance marketing agreements, I’ve always set tiers as “below average,” “performance” and “exceeding the performance” goals. Each goal equates to a tier and correlates to a monthly price for the campaign itself.
The key to success with these campaigns and creating the tiers is a lot of upfront research and due diligence. Once you feel good about your goals and you know they are attainable, you can establish your tiers.
The issue I have had in the past with running these campaigns is not the performance, but in fact reaching the top tier of exceeding the performance goal. At that tier, the client is exceeding their expectation and the agency is billing at a higher rate. While this sounds like a win-win, it is often a short-lived honeymoon period.
What typically happens next is someone in the client’s organization flags the growing agency payments for the performance and realizes that would look better on the company’s bottom line, not going out the door to pay the agency. At this point, contracts can be evaluated to either be renegotiated (when the time is right) or terminated at the end of the campaign term.
On the other end of the spectrum, if your campaign goals are landing in the below average tier, you are most likely not getting paid at the same rate you charge for your marketing service. Ultimately, this performance cannot sustain your agency long term either.
The third option is that you are hitting your campaign goals in the performance tier; this is to be expected in a good marketing campaign and strategy. Typically, this tier is being billed at your regular pricing model. At this point, you are showing the client you have skin in the game, hitting your performance goal, and getting paid what you deserve for your efforts. This tier brings into scope the question, “Why not just charge my regular agency retainer rate in the first place and not have the risk of the downside?
Cons for the client in performance marketing contracts are very limited. If the deal is structured with higher payouts when you hit lofty goals, the client would owe you more money each month. That could be seen as a negative for the client, who might feel they are far overpaying by forgoing a fixed agency payment rate in a retainer agreement. Additionally, if the agency is not hitting its performance goals, the client could be spending time and resources to manage its agency relationship and deliverables that are not performing, essentially wasting the client’s internal resources as well.
Performance Marketing Vs. Retainer Marketing
While performance marketing is a hot topic becoming more popular in the industry, it’s not always so simple as it seems to pay for performance.
Performance marketing is a game of leverage and often lacks balance: Either you are the agency not getting the results you want and therefore getting paid less for your efforts or you‘re exceeding goal expectations of your client who is now paying you a premium. This payment inequality can affect clients and agencies negatively. Fair market retainer marketing allows agencies to get paid what they are worth, and clients to not overpay and have fixed payments that are predictable.