The Continuum Recent AAAA survey with members Client-agency compensation methods Realization that there is a continuum of pricing options. The “Pricing Continuum” ranges from classic/true cost-plus arrangements at one end of the spectrum to pure value added/results based methodologies at the other end of the spectrum.
The Continuum The continuum lays out a progression of pricing methods starting with cost-based methods and moves in the direction of value added methods.
The far left axis of the AAAA Pricing Continuum represents the cost plus compensation method the far right axis of the Pricing Continuum represents pure value added pricing/models such as sales/license of agency developed I.P., Products and/or Services.
Cost-Plus Actualization of all agency costs (labor, overhead, direct client cost and profit mark up) at the end of the project or contract. Cost-plus arrangements are infrequently used administrative complexity variability that can result from the actualization of costs which happens after the fact.
Cost + Labor-Based (Fixed or Variable) Fees There is a range of cost and labor based fee arrangements: Cost based arrangements may entail actualization of some portion of agency cost. Labor-based variable arrangements generally entail adjustment/actualization of labor hours and/or labor cost with a pro rata adjustment based at agreed upon overhead + profit multiplier.
Labor-based fixed agreements are based on estimated labor … however … hours and costs are not adjusted/actualized at the end of the project/contract. N.B. In labor based arrangements labor rates may be predicated on any number of factors: cost based rates, market rates, agency rate card, blended rates, opportunity cost rates, etc. Performance incentive overlays to cost/labor based arrangements can move a portion of compensation from these arrangements in the direction of value added pay.
Fixed Fee Level of agency compensation is negotiated based on the expected scope of client benefits and/or the scope of agency services & work. Negotiated fee for the project or time period does not vary. Factors affecting a fixed fee : value to the client, spending level, budget available, prior year/prior project pay grades, level of agency contribution, etc.
Fixed Fee Fixed fees can be structured to include ancillary features such as partial service guarantees, change order provisions (to adjust for significant scope change) and performance incentive overlays.
Commission/Mark-Up Over one hundred years in use Still has applicability today Generate more or less compensation to the agency based upon the amount that the advertiser invests behind the agency’s ideas Presumably clients invest more in programs that are positively affecting their business results.
Commission/Mark-Up Commissions can be attached to total marketing spend or to any specific type of marketing budget or expenditure including media, production, direct mail, programming, events, promotions, sales/detail aides, PR activities, etc. Rates can vary based on type of service, spending level or based on client business results.
Compensation Based on Client Business Results Many approaches that are directly tied to client business results and/or the performance of marketing activities. Examples: payment per click, per lead, per response, etc. Examples of client business result performance compensation include new product royalties, commission on sales (P&G model), stock options, equity and/or profit sharing arrangements.
Sale/License of I.P. Products/Services Compensation may entail agency retention of ideas and work product (such as New Business materials) or alternatively agency assignment (to the client) of ideas and work product subject to limitations. Assignment limitations and/or agency compensation terms sometimes include non-advertising usage rights provisions; territorial or time frame limitations; limitations on use in specific media/communications channels and post termination rights/compensation contingencies. (e.g. Models, photographers have been using this model for some time. Web 2.0 platforms are licensed also)
Sale/License of I.P. Products/Services Also emerging, non-traditional, business models that agencies independently developing products, business solutions which the agency then sells or licenses out.