Are You Paying Your Ad Agency a Percentage of Spend? You’re Smarter Than That.

462354759_webThe goal of advertising is ultimately for a business to make money, right? If a company pays its marketing agency based on percentage of spend, however, they could be doing quite the opposite.

The number of marketers who assume that paying a percentage of spend is just “how it is” is shocking. Here’s why: the agency a company pays is also trying to make more money for their own company. If they’re paid based on percentage of spend, there’s financial incentive for them to continue spending more and more on campaigns.

There’s a common explanation amongst agencies that charge based on percentage of spend: as a client’s campaigns prove successful by making money, it’s likely they’ll want to increase spend to build off of that success. The client wants a successful campaign that will scale and make even more money, and the agency wants to run bigger campaigns to make more money as well. Agencies will follow the logic that this means that client-agency interests are aligned.

In an ideal world, this is certainly not untrue. A successful ad campaign is making money for the client, so why wouldn’t they want to scale it? If it was as profitable as it could ever become, then, of course, we can’t disagree with this reasoning. But, here’s the kicker: what if that successful campaign could be even more profitable and successful by optimizing it to decrease costs, while driving the same revenue volume? Any marketer is going to want to drive the same revenue on a lower spend.

But, the agency who is charging based on percentage of spend wants exactly the opposite. An agency has no financial incentive to decrease spend and increase ROI – unless there’s a threat of losing the account. Even worse, in this scenario, the agency actually has an incentive not to optimize an account for profitability.

Are there agencies that charge on a percentage of spend basis that would still optimize for profitability because it’s the right thing to do for their client? Possibly. However, dealing with agencies that charge on a percentage of spend basis is not worth the risk.

Instead, marketers should seek out incentive aligned fee structures. Marketing agencies that value their clients’ profitability as much as their own will estimate the volume of work required to successfully manage an account before entering into a client agreement.

Real client-agency incentivized alignment includes billing on a flat fee basis upfront, which means that costs are controlled for the client and agencies have incentive to provide high quality work that produces results to keep a client’s account. To ensure client relationships grow, reputable agencies manage client money as if it was their own, driving the best possible results and ROI.

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