The September 2009 issue of Inc. magazine showcases the 500 fastest-growing private companies. Forty-eight advertising and marketing companies are listed and a recurring theme among those organizations is a performance-based business model. In other words, the client only pays when customers take action. Pay-for-Call, Cost-per-Action, Pay-per-Sale, Revenue-Sharing, Profit-Sharing; make no mistake, performance-based business models contain elements of risk, and are taking center-stage in our current economy.
Well, “taking center-stage” may be overstated as the need to measure marketing performance has been a hot topic for several years now. Case studies that document marketing-return-on-investment (MROI) and articles covering the short tenure of marketing leaders who do not quickly deliver measurable results are numerous. So what’s different about the current trend? Traditionally, one might view the agency business model as low risk-low reward. This means that the advertiser pays 100% for all goods and services and then owns 100% of the resulting efforts. However, I’m sure there are several agencies who would argue that they have always been held accountable for measurable results no matter how the business model is defined. I’m also sure there are advertisers who would counter with agency invoices that they felt did not reflect a low reward trade-off.
All forms of advertising pose some risk, and no agency can afford to work for free – so we can’t hope to eliminate risk or reward in advertising. However, advertisers and agencies can negotiate with one another to find business models that represent acceptable levels of risk and reward for both parties. Performance based advertising isn’t for everyone and it’s not right for every situation; but given the current economic climate it’s worth exploring.
Alan,
There is a dark side here which marketers need to recognize. It may be satisfying to pay an agency based solely on “performance” but it’s short-sited.
Performance-based marketing, Search, PPC, etc., are all demand fulfillment activities. Without demand generation they quickly reach a ceiling beyond which they cannot grow. If this wasn’t true direct marketers would have taken over 20+ years ago.
This model will quickly reach its limit and the marketer will be looking for a new agency because growth has stalled.
Greetings James,
Great point. Performance-Based Marketing does have an element of risk and that is why it isn’t for everyone, and it’s not right for every situation. Performance-based initiatives are often used to generate immediate “net new” customer leads – in that light customer loyalty as it relates to an organizations current customer base is hardly considered. In addition, the metrics used to determine “performance-based success” must be well defined, measurable and reportable in a timely manner. And that is often more difficult than you might suspect:
What’s the agreed to definition of a qualified lead?
What’s the value of a new customer / new deal?
What’s the life-time value of a customer?
These are just a few of the questions that are under review when it comes to performance-based models – and too many organizations don’t really have a good handle on the answers.
At any rate, performance-based initiatives are not silver bullets … just one of several bullets that marketers now need to stay competitive.
Alan See
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