Online marketing community warms to payment-by-results

The barriers that have long blocked the adoption of performance-based fee structures for digital activity are starting to lift.

It seems perverse, but for the 15 or so years of its existence, the most accountable marketing medium ever seen has avoided payment by results. But that could be about to change.

The idea of marketers paying agencies on the basis of the results they achieve has been around for a long time, but has rarely been put into practice, with various proxies being used instead. The most common of these are cost-per-click (CPC), where the advertiser pays only for the traffic delivered to their website by a certain link or search result; cost-per-thousand (CPM), where the fee increases according to the number of people who see the ad; and cost-per-action or cost-per-acquisition (CPA), which can include payment by results depending on the action in question.

More recently we’ve seen cost-per-engagement models being explored, with advertisers paying on the basis of the actions taken by people seeing their adverts, such as watching a video, playing a game or entering a competition. But linking together the entire process from advert to sale and paying the agency on the basis of sales has remained an unfulfilled idea.

Initially, it’s hard to see why. What marketer wouldn’t want, at some stage, to be able to define success in sales terms and incentivise their agency accordingly? Or, equally importantly, want their agencies to take a greater share of the risk involved in a campaign?

For a long time, the resistance to being paid by results was coming from the agencies. Their main argument was that they were rarely in control of the whole customer journey, so in the case of a marketing campaign they could deliver masses of traffic to a website built by someone else and, if that website was badly designed, find their fee reduced because the traffic failed to convert into sales. However, the possibility that someone else might build a much better website than the marketing agency could, thereby increasing conversion rates, was very rarely mentioned.

Of course, it’s a question of managing risk. Agencies have long been able to see the benefits of being paid by the results they achieve, but in a world of specialist providers and siloed channels, the dangers of adopting the model were too great.

As the industry now moves towards greater integration, both of online channels and of online with offline marketing, the risks associated with payment by results, and the practical difficulties associated with implementing it, are diminishing.

So payment by results is now being discussed seriously, although the model most commonly suggested is actually a hybrid. Agencies are looking at deals that offer them a basic fee, enough to cover the overheads of carrying out a campaign, with the profits on top coming on the basis of the campaign’s performance. This approach should work for both parties, since it gives agencies the promise of greater rewards if they deliver while still providing them the stability that they need and that clients, particularly their procurement departments, want.

The barriers that have long blocked the adoption of performance-based fee structures for digital activity are starting to lift

But even though this model has been talked about for over a year, it’s still rarely applied, and I’ve heard suggestions from agencies that it’s the clients that are now dragging their feet. Certainly the deals required to make payment-by-results work are more complex and difficult to agree, at least at first. Trust and transparency are crucial here.

Paradoxically for arrangements that are meant to transfer risk to the agency, there is also increased risk for the marketer if the deal is structured wrongly. Digital marketing is still unpredictable and at a time when budgets are tight, a campaign that wildly overperforms might run up a bill that the marketing department doesn’t have the money to pay.

This question of budgets came up when I interviewed a couple of agency heads in late summer for New Media Age’s Top 100 Interactive Agencies guide. They emphasised the importance for agencies of delivering efficiencies for their clients; saving money as well as making it.

But a couple of factors make it more likely that payment by results will come to prominence next year. The first is that efficiency will only take you so far; eventually you need top-line growth as well. The second is that, if the economic recovery continues, the balance will tilt back in favour of making money rather than saving it as budgets start to increase again.

Payment by results may be best suited to those with transactional websites, but I am starting to hear about pay-for-performance models being tried in other areas of online marketing as agencies of all types look to offer their clients a more compelling proposition.

And the need among agencies for a competitive edge may be the final element required – alongside the integration, the metrics, the budgets and the trust – to push payment by results to the top of next year’s agenda.