Over the years we’ve observed a plethora of methods, theories and concoctions used to compensate the ad agency. These include project-based, retainer/fee-based, incentive systems and various other approaches. Although there’s really no one-size-fits-all answer, there does seem to be a trend among small to mid-size advertisers toward project-based compensation as opposed to retainers.
We’ve found a couple of different reasons for this. First, there is growing pressure on advertisers to control costs. Defining the scope of a project and securing well-defined estimates before work begins results in tighter budget management.
Second, many advertisers don’t have a full understanding of the time and effort required by an agency to execute their projects. Nor, can they anticipate the number and scope of projects that will be needed over an extended period of time. This makes it difficult to establish a fair retainer, so a project-based system simply makes more sense.
It’s important to note, however, that using project-based compensation doesn’t mean you should change agencies for every project. It’s still important to maintain a consistent image over time. Plus, there will be less of a learning curve with an agency that already understands your business. In general, less time learning translates into greater cost efficiencies.
For those who choose a project-based form of compensation, here are some tips to make sure you get the most for your money:
- Don’t assume that project work requires less effort on your part. Make sure the agency has the necessary background materials and a comprehensive understanding of the challenges that must be overcome. Full disclosure and sharing of information is essential for successful work.
- Don’t “hide” budgets. Some clients fear that divulging a budget ceiling will encourage an agency to overcharge. But all too often, the amount allocated is too low rather than too high. In such cases, it’s better to find out early so that adjustments can be made to either the budget or the project scope.
- Work together with your agency to clarify the details of a project upfront to ensure there are no surprises later. Make sure you define both the process for development and how success of the project will be measured.
- Ensure that the process works as smoothly as possible by putting simple agreements into place that specify ownership of materials, payment terms, conflict resolution procedures and any other issues that might arise.
When approached correctly, project-based compensation has certain advantages from an agency perspective, too. Over our 24-year history, we’ve come to value this system for our own reasons, including
- A project-based system allows us to prove our value at a relatively low risk to clients. This gives us the chance to serve a greater number of accounts in more diverse industries. Often, these opportunities lead to trusting, beneficial and lasting relationships.
- We have found that our clients respect our process. They get an estimate for the project in advance and can then hold us responsible for meeting that estimate within a standard 10% variance–as long as the job parameters remain the same. Plus, greater understanding upfront results in fewer disagreements once the work is completed.
Ultimately, there’s no right or wrong way to compensate an ad agency as long as both parties agree. Still, in an industry that changes as frequently as advertising, it makes sense to remain flexible. A project-based system allows each party to evaluate compensation on a case-by-case basis, arriving at the most agreeable terms for the project at hand.