The pay for performance business model might seem at first to be an affordable way to work with your outsourced marketing agency. You don’t need to pay unless you get the results you want.
At first glance, it may seem like a way to save money and tie your expenses to a particular metric. If it’s such a great way to work, then why isn’t every business entering into contracts with this payment model?
What Does Pay for Performance Mean?
Pay for performance, otherwise known as performance marketing, is a business model where the service provider (such as a marketing agency, PPC or social media freelancer) only earns money when they can demonstrate results from their efforts.
This might be in increased leads, qualified leads, sales accepted leads, social followers, page views, or another agreed-upon metric.
The Pros and Cons of Performance Marketing
At first glance, the performance marketing model seems like it would work well for both parties. But if you keep a keen eye, you’ll quickly find some inherent flaws to the model.
Pros
There really are only pros for the budget-minded company in the form of cost savings. However, the amount you save may cost you in quality and other areas.
Cons
Control – or Lack Thereof
For marketing firms, the performance marketing model tends to be a disincentive. There are dozens of factors that contribute to a business’ success that they, as an outside company, have little or no control over. Is it really fair to base their fee on elements that are more in your control than theirs?
Setup Cost
Another problem from the marketing firm’s point of view is the time that is often required to set up a PPC campaign. Building a strong foundation for branding, setting up social media accounts, and building landing pages takes time and immense effort.
In the performance marketing model, the marketing agency does all these advance work without compensation. That means the marketing firm pays their expenses and employees from their cash reserves, without even knowing how much they will eventually be paid for their work. You better have one heck of a amazing product for someone to take that deal.
Accuracy of Results
The problems with performance marketing, however, do not all lie on the side of the outsourced marketing firm. As a client, you may feel that you are in the driver’s seat: only needing to wait for results before you pay. How confident are you in the accuracy of the numbers being produced and invoiced? After all, they built the marketing campaign and the accompanying analytics system. To a large extent, they can make the numbers look any way they choose.
Recovery Cost Pass Through
Cost also comes into play. There is no way any intelligent agency is willing going to run at a loss upfront and not recover that cost at a healthy profit. In the end, you may pay twice as much thinking you got a great deal. Remember: they control the lead flow and could flood your team with so many SQLs your team can’t handle it. What if your sales team isn’t that good and doesn’t close these leads? Now you pay for the leads and don’t gain the revenue to pay for them.
Talent Quality
Another element is talent. Usually, smaller agencies that are desperate to win business are the ones willing to take on these types of contracts. How good are these people if they are scrambling for contracts. Talented agencies don’t need to negotiate that hard because they know what they can deliver and have plenty of clients that value them.
Trust
Perhaps the most glaring flaw in the performance marketing model is how it affects the trust between the two parties. Sometimes, it comes to a point that neither party is pleased with the arrangement and is unlikely to work together again. In fact, it’s almost inevitable that one side will feel that they’ve been compensated unfairly.
Strategic Marketing Is Best
Business relationships that are built on mutual trust stand the test of time and succeed beyond those transactional relationships. Not being invested in the long, strategic approach successful marketing requires unfortunately exposes client’s desire for quick-wins or worse.
In our experience, companies who have begun dialogs with us and then suggest a pay-for-performance model were not disclosing their limited budgets or marketing disasters of their own making. Unfortunately, companies will staff up on sales people and run lean on marketing until they realize that sales hunting alone isn’t going to help them reach their goals.
We have been around since 2005. We’ve seen a lot change. All the successful companies have a strategic marketing plan that they review QUARTERLY for optimization and adjustment. Digital marketing and market conditions evolve so fast today, having a CMO you can count on – whether internal or outsourced – is essential.
If all you need is a short-term campaign then pay-for-performance may be an option. But if you want long-term, sustainable results you need to have a plan, work that plan, and require marketing and sales to work together.