It was nice to read about advertising firms cautiously moving to pay-for-performance advertising in The Economist.
At Pinstorm, we started out just over 5 years ago, on May 1, 2004 as a pure pay-for-performance advertising firm. Today, we’re probably the leading practitioner of the craft, with 8 offices across the US, Europe, India, Singapore, Malaysia and China. And we’ve worked with HSBC, Jet, HP, Dell and other global brands.
We think there is simply no option to an advertising firm offering pay-for-performance. The other models are broken.
If an advertising agency charges a commission on a media spend, you know they have an incentive to get you to spend as much as possible. So they can earn as much as possible. But today, brands are built by outsmarting, not outspending. So you’re not likely to be the winner in this relationship.
But, hey, you say, we pay our guys a retainer. We’re not sure that’s any better. Paying a team a fixed price for their time, regardless of what they do with it is just as big a recipe for disaster. You’ll end up with with an agency that tries to just keep you happy, so it can retain the retainer. There’s no reward for great work that moves the needle, so to speak - and no penalty if an agency’s asleep at the wheel. This can’t be an inspiration to either party.
Pay-for-performance is the answer - one that many agency heads have fought for decades. Quoting from the article: "Some agency executives are sceptical about being paid for value, because it is so subjective. They interpret talk about value as code for cost-cutting." We completely disagree.
When asked to present credentials, most firms will talk about how much value they add - but when asked to measure that very value, you hear the bugles of retreat. And we don’t think it’s about cost-cutting - but quite the opposite, but more on that later. More importantly, marketers don’t have subjective measures of effectiveness. Their jobs are on the line if they aren’t able to convince their bosses and their boards that they’re objectively, measurably adding value.
The problem is different: with agencies fighting furiously to get business, commissions have dropped from the 15% level to about 1.5% today. And retainers aren’t going up - they went down in many cases in this downturn. With all this, the advertising persuasion has become an even more terrible business to be in. It’s not strange that after all these decades, there are no advertising billionaires, no ad agencies in the Fortune 500 - and because there’s really so little money in the business, it’s crazy difficult to attract great talent.
Pay-for-performance can change all that - it can bring MORE money into the business, not less. For starters, it helps advertising spend go from a fixed marketing budget to part of a variable cost-of-sale. And when that happens, the spends get uncorked. One look at why people have thronged to spend money on clicks from Google is because marketers love to pay for advertising performance of any sort on a variable basis.
More so, pay-for-performance lets you break away from creative straightjackets - your client isn’t likely to interfere with your ads as much, as long as you’re on brand, if you’re being paid for how your ad works. And you’re less likely to think first of what will impress the judges at Cannes, and more of what will impress your consumer, on pain of not getting your salary and bonus. Of course, sometimes, you might end up doing both, which is a fine thing.
Three, to repeat the point, it’s not subjective. All of us in the digital world have learned to live and die on the sword of how our ads perform. You may claim that you don’t have that power of objective measurement on TV or Print. We think you’re somewhat right here - but not for long. Soon all TV and all print - not to mention all radio, outdoor and other media will be delivered digitally, and there’ll be mechanisms to measure effectiveness in each of these - if there aren’t already.
And it’s not just about clicks, leads and sales. There are sufficient measures already to measure all these supposed intangibles when it comes to brand awareness, strength and perception. And for ad firms to be paid according to these.
Comes the final argument - "Oh, we’re okay to take some part of our compensation as a variable, but hey we can’t walk away from our fixed income". Why so? This is probably more about your confidence in your art and craft than anything else.
At Pinstorm we’ve been 100% pure pay for performance from day 1, and we’ve managed to fund our own growth around the world over these years based on the monies we’ve earned. We go to more insane lengths than most agencies can imagine - we even pay for all of the media spend from our own pockets - and we bet every single day that our media investments combined with our strategy and our creative - all paid for by us, if you please - will make money for our clients and for us. And truth be told, often it does, though sometimes it doesn’t.
(We’re big believers in bundling, not unbundling media from creative. But that’s perhaps a different article, a different blog post.)
We’ll end this with an analogy - the traditional world of media commissions is like the world of stock brokerages - a commodity offering where growth comes from buying market share by offering lower fees. The creative side of agencies, paid on a flat-fee basis are the stock-recommendation analysts, on salary with no responsibility for the success or failure of their recommendations. Both these segments are but a small part of today’s financial landscape. Right for some investors, but not all.
In that vein, we’re probably the mutual funds, the portfolio managers, the hedge funds or even the venture capitalists of this world, if you will. And I posit that it’ll be firms like ours or those after us that can open up this landscape and bring a lot more growth, vibrancy and innovation into the world of advertising and marketing. Yes, we will have our market crashes; yes, we will have our boom and bust cycles. But marketing and advertising are far too important activities to be left to some combination of media commissions and flat fees.
Of course, I’m curious now how the people at The Economist think they’ll charge for advertising now and in the future. :-)
Mahesh Murthy
Founder, Pinstorm.
