Performance marketing agency Kinesso believes it has the edge over the competition, thanks to a bold leap it’s taken. It’s moved to a payment-by-results model.
Working with select clients, contracts have been agreed where the agency’s payment terms are directly tied to its results as part of a revenue share agreement – a huge shift from the usual flat-rate retainer model.
The risk is high but so are the rewards, says Chloe Hawking, UK&I CEO. She describes the outcome so far as “wildly successful” and is confident of transitioning more of the agency’s clients towards this way of working. Not only does this model reconstruct how the agency is paid, but it also liberates how teams work, which is what marks the difference between simply feasible and actually lucrative.
“It’s the perennial debate of realising efficiency and value on the client’s side, versus battling increasing pressure on gross margins due to digital skills gaps, inflation in salaries and restricted client terms on the agency’s side. There’s only a downward trajectory on old models so we wanted one that allowed more agility,” Hawking explains.
“Legacy models are historically fixed and don’t allow the agency to bring in whatever talent is needed to achieve the client’s goals. We didn’t feel that was a sustainable model for us, so we wanted to shift our thinking and challenge that traditional convention.”
Drive teams to reach targets
The power of the proverbial carrot is clearly working, as Kinesso clients engaged in a payment-on-results model have seen “unprecedented growth”, Hawking reveals, fuelled by teams’ drive to achieve the revenue goal. They’re incentivised to go beyond responding to a brief around the agency’s core digital channel work and use their initiative to suggest things like how to improve the client’s overall sales process.
“It pushes teams to go further and it changes the client-agency dynamic,” Hawking says.
And the latest industry statistics validate Kinesso’s move. A recent survey by the World Federation of Advertisers showed that 74% of marketers believe the next three years will bring a shift towards outcome- or output-based agency payment models. Meanwhile, Forrester insights show that pricing and value are the main factors in 33% of agency terminations, with 30% of marketers wanting different pricing models.
“Something’s got to change. There’s so much pressure for growth in a tougher economic climate. You need that deep partnership and that ‘in it together’ level of commitment to achieve the growth that both agencies and clients are looking for,” Hawking reflects.
Cons of results-based contracts
But does this exponential growth come with a cost? In an industry notorious for long hours and a high-pressure culture, leading agencies admit to a 32.4% churn rate in 2022, up from 26% the year before. While Hawking doesn’t necessarily believe it’s a harder way of working, brand strategist Zoe Scaman is wary of that carrot turning into a stick.
Scaman worked under a payment-by-results model between 2010 and 2011 in her role as a communications strategist for Naked Communications’ Coca-Cola account in Australia. She recalls it being successful at the time, particularly for the ripple effect it had in attracting other clients to the agency. But she is concerned that it’s going to squeeze already overloaded agency talent further.
“One of the easiest ways to make up margins is to get more out of your talent without necessarily paying them more because there are limited things agencies can do about other overheads,” says Scaman, who now runs her own consultancy, Bodacious.
“I think payment-by-results is just going to make it 10 times worse. Agencies will expect people to juggle twice as many accounts because it’s a ‘pay-for-performance’ model. They’ll need to make sure they’re covering their costs, so they’re going to try to squeeze as many accounts under one account director as possible, which is then going to drive that person into the ground.”
It’s also potentially dangerous, Scaman adds, as so much of a client’s business performance is outside the agency’s control. “Do you have any influence over trade negotiations? Over distribution? Over manufacturing? Over product quality?”
Similarly Josh Harris, managing director at brand strategy and creative agency Neverland, has worked under payment-by-results models but found the effect on individual team members was more stick than carrot, which had an adverse effect on the work.
“There was a malice attached to it which almost conditioned the agency to do things just to meet the expectation, as opposed to push for something that was bigger and might be better. I think some people within the business might have felt that there was little point risking anything for greater gain, as we stood to lose more if we didn’t meet the expectation,” Harris recalls.
“It is risky because your growth models are based around certain numbers and you’re staffing to safely deliver against that level of work based on those forecasted projections. In a payment-by-results model, it’s difficult to give everybody proper job security. If you fall under the target, you’re left in a position where you can’t survive unless you either apply the same logic to people’s pay as you do to a client bonus structure, or you will have to make savings in other ways.”
The only way around that, Harris concedes, is to have such close client relationships that it fosters a detailed understanding of the KPIs – something Hawking is confident is in play at Kinesso. “It truly links to the business outcomes that the client needs to achieve,” she confirms.
When it pays to take the leap
Other factors in Kinesso’s favour are its scope of work being largely digital – such as search, social, ecommerce and website experience – and the breadth of it. Both Scaman and Harris agree that a payment-by-results model lends itself more to this type of marketing agency than others that are more creative or singularly focused.
“It would become a challenge if you look after one specific area and are having challenges with attribution because you have to be able to prove that what you did has led to the results,” Hawking clarifies. “The breadth of our services allows us to partner with clients holistically. That means we have fewer concerns about attribution because we provide a range of services that led to that total revenue in that period – that’s why this model has probably not been successful in the past.”
Hawking is realistic that this solution won’t work for all clients and those that take the leap with them are committing to a huge internal shift.
“There’s a huge amount of analysis and scoping that goes on to work out whether it would be a viable offering for a client. Because it’s not going to work in all cases,” Hawking acknowledges.
“It’s a big change in the dynamic of the partnership. You become business partners, not just agency and client.” And like any successful partnership, it only works if there is transparency and trust.