The Five Marketing Agency Compensation Models for Brands
As the years come and go, just like leaves, brands’ priorities change with the season - budgeting season, that is. Naturally each coming year will include department cuts and unexpected costs, but brands must prepare for upcoming expenses best they can.
If a brand is considering hiring a marketing agency, it is important to set aside appropriate budget. Depending on the scope of needs, some financial plans are more necessary than others but, ultimately, it is up to the client and agency to decide how they will price fees during their agency-client partnership.
What are the possible compensation models for agency-client relationships?
Project-Based
The Project-Based compensation model is for projects with a clear beginning, middle, and end. The agency and client agree on a fixed flat fee with defined expectations and scope based on estimated hours and rates. An example of a simple and straightforward Project-Based model is an agency designing five email templates for a brand or building a website.
The benefit of the Project-Based model is that the client is informed about the project’s cost and timeline and familiar with the agency team in charge of the process.
The difficulties with the Project-Based compensation model is that the margin for error is small and when projects change or estimates are off, the agency might bill the client additional costs. The fixed budget may harm the project’s progress by limiting the agency’s innovative ideas, not taking advantage of the agency’s full capabilities, or sacrificing quality to meet due dates.
Tension and a lack of trust may increase if the agency feels pressure to stick strictly to the timeline while attempting to meet the client’s changing demands.
Time & Materials
The Time & Materials compensation model is typically based on a negotiated hourly rate with a general estimate of the projected hours it will take to complete a project. The estimation is calculated based on a rate card (each agency role has a different hourly rate), or a blended rate (an average of the hourly rate for all roles in aggregate).
The Time & Materials payment model is billed to the client as the work is completed. The actual work may require the agency to go over or under the projected hours quoted in the estimate. A brand using an agency to help redesign a website that will involve a complex Discovery process and unknown deliverables for execution could benefit from a Time & Materials compensation model.
This model is beneficial for long-term needs that require flexibility to account for the project’s dynamic changes. Instead of working on fixed-fees and waiting on schedules and timelines, resources and time can be better spent on more intensive parts of the project.
One difficulty with the Time & Materials model is the lack of budget control. The client and agency must work extra hard to meet the estimated budget, hours, and scope.
Retainer
The Retainer compensation model is generally a static, monthly fee for a “bucket of hours” of the agency’s marketing service. Similar to the Project-Based model, the agency team working with the client is consistent and prioritizes the client’s ongoing needs. In this model, agencies act as an extension of the internal marketing team. The client may change their ask or shift priorities, but if the needs outstrip the monthly retainer, then change orders can be added to the monthly retainer..
Retainer models are commonly used for the creative side - each person keeps a time sheet showcasing the time devoted to the account. An example of a Retainer model is a brand outsourcing an entire email marketing strategy to an agency including ongoing list management, their monthly newsletter, and weekly promotions.
The benefit of a Retainer is having a dedicated agency team focused on solving the client’s most pressing needs. The agency also builds institutional knowledge over time since the team remains consistent over time.
From the agency’s perspective, the Retainer offers predictable revenue that enables a dedicated staff focused on the client. With a Project or Time & Materials model, the ad-hoc team working on a project will likely dissipate when the work is done - losing accumulated knowledge.
Occasionally a client will begin with a Time & Materials or Project Based relationship and move to a Retainer once trust and expertise are established.
Performance-Based
Performance-Based compensation relies entirely on the agency’s work outcome. The client and agency set predetermined goals that tie the compensation to a performance metric and, if the outcome exceeds expectations, the agency gets additional bonuses. If an agency were to generate additional qualified leads for the brand, for example, the agency would get commission.
With Performance-Based compensation the goals are clearly defined, the client knows what to expect and does not need to manage progress. Agencies can also better optimize their resources since they are pushing for a specific outcome..
For Performance-Based compensation to be effective, the parties need to agree on specific performance metrics to measure success. With this model it can be difficult to agree on metrics and attribute certain contributions to the KPIs. If metrics are unclear, it leads to disagreements about whether or not the agency should be paid bonuses.
Media Spend Fees
If the agency is planning and purchasing media for the client, a Media Spend Fee compensation model makes the most sense. The agency is paid a management percentage fee based on the total media spend which is typically tiered based on the spending levels. Some examples of Media Spend compensation can include: pay-per-click advertising, spot or national TV, radio, display, programmatic buying, etc. An example of this compensation model would be a 12% fee for a spend under $500K; 10% for a spend above $500K and below $1M; 8% for a spend over $1M.
This compensation model is not based on results. Ultimately the client decides if the value of results equals the cost for the work to place the buys.
There are many variations and mixtures to the models outlined above. Often hybrids give the client the best results and the agency the stability of working with the same client over time. The right model blend depends on several variable including the client team, industry, type of work, expertise of the agency, etc.
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