The word ‘partnership’ gets thrown around freely by marketing agencies these days. However, performance marketing agencies have traditionally operated on a retainer-based fee structure.

Regardless of how well (or poorly) a client’s business performed, the agency’s fees remained fixed. Typically, this would mean a monthly fee or percentage of media spend, whether the client’s sales soared or slumped. This model often leads to misaligned incentives, with agencies getting paid regardless of their impact on the client’s bottom line. 

However, the landscape of performance marketing is rapidly evolving, and at Impressive, we decided to drive this transformation. We wanted to look at a true partnership model where our clients’ success is our success.

This means we’re shifting many of our clients from a traditional retainer model to a performance-based fee structure. This change is not just about adopting a new pricing model – it’s about forging genuine partnerships with our clients.

The critical case for aligned incentives

When both parties have skin in the game, the relationship becomes more collaborative and productive. A live case study of this is our work with a leading fashion retailer. After a successful year on a traditional retainer model seeing 25 percent revenue growth, we approached them about a new ‘performance-based’ contract. We said, ‘let’s share the risk – when trading conditions are tough, don’t pay us as much.’ They said ‘yes’. This approach ensured that we were as invested in their success as they were.

Two models for success

Let’s take a look at two primary models when it comes to a solid performance-based approach for our marketing agency:

Full Performance Model: Here, our fees are based on a tiered percentage of revenue targets. While the contract is unique for each client, there are typically tiers. We achieve a smaller percentage of revenue for hitting a target, but a higher percentage on revenue above that target. This ensures our goals are fully aligned. 

Blended Model: This combines a base retainer with performance bonuses. For instance, a client might pay a nominal base of $5,000 a month, with additional bonuses when we achieve agreed revenue targets. This is a hybrid between old and new and is a better fit for some companies. 

This model does mean taking on risk. To help us manage that risk, before entering into a performance-based agreement we conduct thorough due diligence. It’s crucial to ensure there’s a good product-market fit and that the business has a solid sales history. Performance-based fees also apply across the board, including email marketing, SEO and media.  

Flexibility and agility is key in achieving client ROI

In the fast-moving world of performance marketing, agencies that remain inflexible will inevitably fall by the wayside. But you have to be willing to put your neck on the line. With a performance-based model, if we don’t hit our targets, we don’t get paid as much. This level of accountability is rare in our industry and forces marketing agencies like ours to stay agile and results-oriented. 

But the model doesn’t mean agencies like ours bill like an accountant – who charges based on time and effort. Our fees are directly tied to the results we deliver and to your success. Our flexibility extends beyond just fee structures. We can offer agility in service delivery, reallocating hours as needed across different functions like data analysis or design.

The response has been overwhelmingly positive, with a 100 percent take-up rate from those we’ve offered this model to. 

When looking at a successful partnership we have a few criteria:

• E-commerce focus: To date, we have used this model exclusively with e-commerce businesses
• Revenue threshold: We need to see a reasonably predictable sales history, so we don’t make this offer to startups or low-revenue companies 
• Due diligence: We assess product-market fit and historical sales performance to ensure a strong foundation for growth

While we’ve initially pitched this model to clients we’ve already worked with, we’re open to new brands, provided they fit within our due diligence process.

CFOs (chief financial officers) and finance managers appreciate this model because it’s a true partnership. It’s not a brand-new concept, but few agencies have implemented it at scale. However, we do retain our traditional retainer model for clients who prefer that approach. 

What’s the downside?

While the shift to performance-based fees has brought significant advantages to both agencies and clients, it is not without its challenges. Transitioning from a traditional retainer-based model to a performance-driven one requires a re-evaluation of several operational and strategic aspects of the business:

Alignment of expectations: One of the challenges is aligning expectations between the agency and the client. Setting realistic and achievable performance targets is crucial, but can be difficult. Both parties must agree on what constitutes success, which involves detailed discussions and clear communication. Discrepancies in expectations can lead to dissatisfaction and strained relationships. 

Financial predictability: CFOs and finance managers who are used to predictable agency fees sometimes struggle with their budgets, given that our fees can vary significantly from month to month. This is, of course, tied to significant changes in revenue, but we do find it a difficult mindset shift for some. 

Client readiness and education: Not all clients are ready for or understand the intricacies of a performance-based model. It requires a shift in mindset from paying for services to paying for results. There’s no hourly rate, fixed hours or month any more. Educating clients about the benefits and potential pitfalls is crucial. Some clients may be hesitant due to the perceived complexity or uncertainty of this model, especially those used to the predictability of retainer fees. Overcoming this resistance involves demonstrating past successes and building trust through transparency.

Internal resource allocation: For the agency, this model necessitates a more agile approach to resource allocation. Since income is tied to performance, there’s a constant need to optimise team efforts and ensure that resources are directed towards high-impact activities. This can put pressure on teams and require more dynamic project-management practices. For example, during a peak campaign period, resources might need to be reallocated from lower-priority projects to ensure the success of high-stakes campaigns.

In conclusion

To clients and other agencies considering this model, my advice is straightforward: be prepared for higher service fees, but only if those fees translate to significant revenue growth. Agreeing on targets can be a challenge, and it may complicate budgeting processes for CFOs. However, the benefits of aligned incentives and a true partnership far outweigh these challenges.

The shift from retainer-based to performance-based fees is not just a trend but a necessary evolution in performance marketing. At Impressive, we’re committed to this model because it aligns our success with that of our clients, fostering trust and driving mutual growth. As the industry continues to evolve, those who adapt will thrive, while those who cling to outdated models will struggle to keep up.

Robert Tadros is an award-winning entrepreneur and the founder of Impressive, Australia’s fastest-growing performance marketing agency. He now oversees a team of 70 people and was ‘Best Entrepreneurial Talent’ at the 2019 MumbrellaNext awards and a finalist for the 2019 CEO Magazine ‘Startup Executive of the Year’ award.