Wednesday, May 06, 2009

How Should Agencies Define “Value” In A Value-Based Compensation Model?

Ever since Coke declared that they were going to be switching to a value-based compensation model with their agencies, there’s been much discussion as to how best to define value in a way that both sides can agree to.

Traditionally, the agency was the one that defined the value of an assignment, basing it on the number of people and the hours needed to fulfill the assignment. Under their new model, Coke is going to determine the value that the agency delivers.

Any agency profit will now be contingent on outcome rather than effort.

And while we can’t argue with what Coke is doing—value-based compensation will soon be the norm—we don’t think that agencies should give up their right to define what the value is that they offer their clients.

As long as that value is based on both outcome and effort.

And, as long as that outcome is based on something that the agency has control over. After all, no one should be held accountable for something that they can’t control.

Which leads to the question, what do agencies actually have complete control over in terms of outcome?

Sales? Hardly. Sales are contingent on many factors, only one of which is advertising. How about brand awareness? Or brand consideration? Or brand preference? Or purchase intent?

Traditionally, these have been fine measures of value, back when advertisers actually had one agency of record. But that’s no longer the case. When five or more agencies – creative, digital, media, point-of-sale, etc – all having a say in how a brand is perceived, and, whether it’s ultimately purchased, how can any one agency be held accountable?

While agencies cannot really control business results, the one thing they do have tremendous influence over is how long viewers spend with the commercials that they create. This outcome is in direct correlation to their creative capabilities. And, since an advertiser sees value in viewers watching more of their commercial rather than less, view duration seems to fulfill the value parameters for both sides.

Obviously, it requires advertisers to free up the reigns when it comes to how involved they are in the production itself. If they want their agencies to be accountable, then they will need to back off when it comes to producing the commercial.

Once they okay the script, advertisers have to turn the production over to their agencies. Granted, it requires a higher level of trust between agency and advertiser. Not to mention, a willingness from both parties to share risks and rewards.

Some advertisers won’t want to work this way. For that matter, neither will some agencies. But for those agencies that have a confidence in their ability, Coke, and the other marketers that follow down the path of value-based compensation, have just done them a tremendous favor.

Branding’s job, after all, is to increase sales over time. If so, then isn’t it time that advertisers started to pay their agencies based on how much time they actually create?

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