Friends from the Creative industry generally lamented about being under paid and under appreciated while clients were genuinely concerned if they can recoup their investments in creative and production costs. After I published "How to Pay your Advertising Agency?" at my blog and EzineArticles, I was specifically asked if I can provide an example of "Pay by Performance" with a marketing agency or advertising agency.
Assuming the client has a decent agency brief and the marketing/advertising/creative agency understood it perfectly, then they actually conceptualized an equally decent campaign; theoretically there should be good returns. However, the marketplace is a strange place where big changes can speedily shoot a hot product down into the bottom of a valley. Though rare, it has happened before. It is such uncertainties of the marketplace, doubts and fears of clients and the difficulty of quantifying the value of "creative" people that the quotation is grounds for heated debates.
I believed a fair price is one where the client and the marketing agency agreed upon. The price can be agreed upon but "unfairness" somehow would still cropped up. The client might not be able to attribute his success to the press advertisement as there was no tracking device established. The designer might start to believe he has been paid peanuts when the sales results hit the roof. Even nothing was said and expressed; dissatisfaction can quietly seep in and adversely affect an otherwise cohesive working relationship.
So instead of offering or accepting a fixed price, both parties can consider the "pay by performance" option. To "pay on results" or "pay by performance" is not as simple as it might appear. Marketing, advertising and communications is largely a skill based, creative industry; where the "products" are ideas and action taken. Just as a beautiful fireworks display is over when it's over, ideas exposed can never be taken back to reuse and recycle in their original forms. I am sure you can see the challenges of a "pay by results" program. The real costs that were tough to measure are the creative cost though it is not impossible. To effectively deploy "pay by performance", you would need to overcome various challenges, and those had been discussed at another of my article, "Does Pay by Performance works with an Advertising Agency?".
After considering those factors and you still think "pay by performance" is for you, you may like to consider this working model.
1. Established what constitutes sunk cost, which could easily mean time (for research, analysis, brainstorming, conceptualization, copywriting, visualizing, story-boarding, desktop execution), material (such as photography with photographer, models, studio, props or purchased photo images or database for direct mail), traveling expenses.
2. Establish the quantum of such cost. Where cost cannot be quantified, you can check with your Association of Accredited Ad Agencies for recommended rates.
3. Client needs to agree to the quotation and to paying the sunk costs
4. Both parties need to agree on the performance measure. This includes fixing the deliverables and determining the expected results for each of these deliverables. One of the most obvious, and accurate, deliverable would be response to the campaign. This is usually measured by including some kind of direct response within the campaign. It could be a call-in number, an email or a web site.
5. Payment of the performance level should have a clear end date. Companies should not be afraid to pay. Alternatively, they can put a cap on the quantum, assuming that they are expecting a runaway success for the campaign. Again, this cap needs to be agreed. For example, both parties can agree to a $50,000 or a $5,000,000 cap to the performance bonus portion of the agency fees depending on the size of the project.
There are of course many ways to spin this. Above is simply one way to look at a complex arrangement. I am sure you can come up with a few creative ways to do this.