marketing management consultants

Steps to creating a price-based���agency compensation model

TrinityP3 Pty Ltd

2013

© Copyright 2013

marketing management consultants

What is a price-based compensation model?

•  Most current compensation models are either spend-based (commission) or cost-based (head hours and retainers).

•  A price-based model sets a price, or monetary value on the individual outputs of the agency.

•  The advantage over the popular cost-based model is that it takes into consideration more than just the actual resources required and sets a price reflecting the value.

marketing management consultants

How do you develop a price-based model?

•  The approach for developing a price-based model is:

1.  Defining the outputs required of the agency.

2.  Defining the operational parameters.

3.  Calculating the resource requirements and cost of producing these outputs.

4.  Adjusting the valuation based on the strategic importance.

• 

marketing management consultants

Defining the outputs required of the agency

•  You define the tasks, outputs or deliverables you require of the agency. •  This can be quite specific and

granular eg. Full page press. •  It can be broader eg. Magazine ads

or campaigns. •  It can even be top level eg. All print

ads or campaigns.

•  It is essential to clearly define the details of each category including process and final output.

•  This detail allows accuracy in calculation and consistency in approach.

•  TrinityP3 has developed pricing models with five task types, 40 output types and more than 300 different defined deliverables.

•  The granularity / number of project types depends on the brand strategic requirements.

Example - Develop TV Campaign; •  Includes briefing, comms strategy and

creative concept development, concept testing research attendance, production and creative supervision.

•  Typically will have three or more executions of more than 15 seconds in length.

•  All external costs excluded.

marketing management consultants

Defining the operational parameters

•  Each brand team in each market will have different operational requirements of their agency.

•  These operation variables can include: •  Number of concepts presented. •  Research requirement. •  Work In Progress meetings. •  Approval processes.

•  These operational requirements need to be defined at either a brand level, market level, regional level or global level.

•  These parameters directly impact on the actual cost of delivery as they impact resource utilisation.

•  The more consistently the parameters are defined, the more consistent the pricing model.

Example – Brand Strategy Development; •  Occurs annually by brand. •  Requires representatives from account

management, creative and strategy. •  A maximum of five agency staff

prepare and attend.

marketing management consultants

Calculating the cost of these outputs

•  The cost is based on two elements: •  Cost of resources – including

salary, overhead and profit. •  Resources required – including

level and mix by discipline.

•  TrinityP3 uses historically collected resource requirement data (both industry and client specific).

•  TrinityP3 also uses charge out rate data or calculates charge out rates from salary data for each market.

•  TrinityP3 define four major categories of agency resources: •  Account management. •  Strategy. •  Technology. •  Production.

•  For each category and in each market we produce a blended or weighted average charge out rate.

•  TrinityP3 also applies low, median and high benchmark reflecting the variance in agency types.

Example: Small versus large, Independent versus Multinational.

marketing management consultants

Adjusting valuation for strategic importance

•  The price calculated is simply a process of multiplying the blended resource rate by the benchmark level of resource hours required by resource category.

Example: Account Management Hours x Account Management Blended Rate + Strategy Hours x Strategy Blended Rate + Creative Hours x Creative Blended Rate + Production Hours x Production Blended Rate = Price for Output. •  This calculation provides the cost of

the service but not the value to the brand.

•  Apart from using the Low, Median and High for the type of agency, it can also be used to classify the strategic importance of the project.

Example – Brand versus Promotional TV Commercial; •  Rationally it takes the same number of

resources to make a brand TVC as a promotional TVC.

•  However, a brand TVC will have a much higher level of media investment over a longer period of time.

•  Therefore it is High Value and you would use the High Price.

•  The promotional TVC may run for only a few weeks and is therefore Low Value using the Low Price.

marketing management consultants

The price-based compensation model

•  When implementing the price-based compensation model it is important to remember: •  The purpose is not to compensate

the agency for every hour of resource they use but to provide a fair price reflective of the value of the task delivered.

•  It requires clearly defining the expectations and requirements of the agency so they can manage their resources to deliver these costs and time effectively.

•  Inefficient processes, such as excessive iterations of creative concepts, repetitive meetings, protracted approval processes will negatively impact the agency’s profitability.

•  On the plus side the price-based compensation model provides many benefits to marketers and agencies when properly implemented including: •  Providing alignment between the

marketer and the agency on the strategic and financial importance of each project.

•  Significantly decreasing disputes on resources and project over-runs.

•  Allows brand teams to better budget their project costs against agreed fees for service.

•  Provides an accountable user-pays system, eliminating the unseen subsidizing which occurs in many multi-brand retainers.

marketing management consultants

For more information contact…

TrinityP3 Pty Ltd Sydney

+612 8399 0922 Melbourne

+613 9682 6800 Hong Kong

+852 3478 3982 Singapore

+65 6631 2861

people@trinityp3.com www.trinityp3.com

@trinityp3 www.trinityp3.com/blog/ TrinityP3 Darren Woolley