Six pricing factors, commercial components and cultural tactics to consider for a better client-agency commercial relationship, based on research for the IPA - by Alchemists’ Vlad Komanicky.
Over the last 12 months, financial arrangements between clients and agencies have come under scrutiny. When the impact of COVID 19 on the economy became apparent, many procurement teams were tasked with identifying immediate savings and marketing teams had to renegotiate their budgets (or often accept swingeing cuts).
Agencies had to dial-up or down specific resources regardless of contracts – they could not insist on rigid T&Cs in such a fast-moving environment. The pandemic has given long-standing discussions around client-agency commercial models and their flexibility a fresh urgency. As circumstances continue to change and boards and procurement ask for evidence of innovation, marketers need agency partners to develop more agile and adaptive commercial pricing models.
Forward-thinking agencies are already on the front foot in exploring choices beyond the traditional 'timesheet' based retainer - but they are naturally risk-averse if a suggested arrangement appears to be less lucrative than their current one. Many also think they can only begin to discuss innovations to pricing when the client relationship is a long-standing one.
These are barriers easily overcome if there is a robust framework to guide pricing discussions, which clearly helps evaluate risk and reward and shows how value can be delivered to clients and agencies.
The critical insight is that one size does not fit all when it comes to pricing.
The rule of six – the pricing factors to consider
Alchemists recently outlined such a framework in its joint paper with the IPA called Pricing For Success – How To Build A Sustainable Commercial Partnership.
The aims of procurement, the marketing team and the agency need to be triangulated within a pricing system that satisfies all parties. The right approach to assessing incentives, benchmarking, the value of outputs and rewards means a range of options can then be put on the table for discussion.
While the fundamentals of pricing remain the same – you can price or buy agency services based on time and materials, outputs or results – how they're utilised needs to evolve. We use six pricing factors that both client and agency need to assess before beginning commercial negotiations, and guide each party to select the most appropriate components to consider when building their commercial relationship.
These factors include:
- The level of ambition the client has for the agency’s work
- The impact the agency's services have in the real world
- How well clients can credibly attribute results to the agency’s service
- The level of internal capabilities possessed by both parties to manage an ongoing complex commercial relationship
- The stage of the client-agency relationship (which can range from mainly transactional to total trust)
- The combined tolerance of both parties for risk
Commercial components of an agreement
Once these factors have been assessed honestly, they provide a baseline for discussion about which commercial components will be most suitable for the mission at hand – some of these components are more complicated than others to implement and manage on an ongoing basis.
For simpler client tasks or when ongoing strategic support is the requirement, the solution could be a retained team or project team. Simultaneously, more complex or flexible outputs may involve discussions around a creative or production menu approach. The arrangement might lean into commission or licensing/subscription fees where other approaches are less suitable.
Bolder agencies and clients who are confident they score highly in any notional assessment of the six pricing factors may decide to keep a close focus on outcomes - and link clearly measurable metrics and KPIs to a more complex commercial model that could include business performance-based payment or a value/equity deal.
Culture of openness
Sensitive discussions on pricing require an approach of thoughtful innovation. Client and agency have to proceed at a comfortable pace for both and stress-test whether the innovation is likely to make their relationship better.
If an agreement is working well, definitely don’t tear it up without careful consideration. But both parties must revisit and review commercial arrangements continually, with procurement in the frame, to identify and resolve proactively any issues as they arise.
Marketers and procurement need to have open dialogue at every step in commercial negotiations if they want to develop a successful commercial relationship and meet their joint objectives. Agencies should also request the inclusion of procurement in discussions at the earliest opportunity, rather than shy away from procurement’s participation to avoid any potential pitfalls in the future.
Marketing expenditure should be managed as an investment rather than cost. And for its part, procurement needs to make efforts to understand marketing’s ambitions for the work and look beyond pure financial efficiencies. Such goals might include gaining market share, increasing average revenue per person, or building an audience that delivers value way beyond any level of cost savings.
As a real-world example of the process, Alchemists started work with a global client who wanted to find a strategic agency partner to guide a significant brand transformation, with the aim of retaining market leadership and increasing relevance with younger consumers. Together, we selected an ambitious and innovative agency structure underpinned by a solid commercial model. We also implemented an evolving commercial construct that gave both agency and client time to reflect on their transition. Once the client and agency established their relationship, we introduced a more advanced commercial component, such as outcome-based remuneration.
Agencies have the ambition to retain their position as strategic partners to clients. We recommend that they bring their creative and strategic acumen to how they think and structure their own commercial relationships.
Great commercial relationships provide a sound foundation for mutual growth and success, but they ask for a level of maturity on each side to implement and monitor. A new year's resolution to review your approach to and guidance for negotiations should be a priority for both marketers and agencies in 2021.