http://www.trinityp3.com/ Darren Woolley, MD of TrinityP3 provides steps to creating a price-based agency compensation model

1. Steps to creating a price-based
agency compensation model
TrinityP3 Pty Ltd
2013
© Copyright 2013
marketing management consultants

2. 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.
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3. 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.
•
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4. Defining the outputs required of the agency
• You define the tasks, outputs or • TrinityP3 has developed pricing
deliverables you require of the agency. models with five task types, 40 output
• This can be quite specific and types and more than 300 different
granular eg. Full page press. defined deliverables.
• It can be broader eg. Magazine ads
or campaigns. • The granularity / number of project
• It can even be top level eg. All print types depends on the brand strategic
ads or campaigns. requirements.
• It is essential to clearly define the Example - Develop TV Campaign;
details of each category including • Includes briefing, comms strategy and
process and final output. creative concept development,
concept testing research attendance,
production and creative supervision.
• This detail allows accuracy in
calculation and consistency in • Typically will have three or more
approach. executions of more than 15 seconds in
length.
• All external costs excluded.
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5. Defining the operational parameters
• Each brand team in each market will • These parameters directly impact on
have different operational the actual cost of delivery as they
requirements of their agency. impact resource utilisation.
• These operation variables can include: • The more consistently the parameters
• Number of concepts presented. are defined, the more consistent the
pricing model.
• Research requirement.
• Work In Progress meetings.
Example – Brand Strategy Development;
• Approval processes.
• Occurs annually by brand.
• Requires representatives from account
• These operational requirements need
management, creative and strategy.
to be defined at either a brand level,
market level, regional level or global • A maximum of five agency staff
level. prepare and attend.
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6. Calculating the cost of these outputs
• The cost is based on two elements: • TrinityP3 define four major categories
• Cost of resources – including of agency resources:
salary, overhead and profit. • Account management.
• Resources required – including • Strategy.
level and mix by discipline. • Technology.
• Production.
• TrinityP3 uses historically collected
resource requirement data (both • For each category and in each market
industry and client specific). we produce a blended or weighted
average charge out rate.
• TrinityP3 also uses charge out rate
data or calculates charge out rates • TrinityP3 also applies low, median and
from salary data for each market. high benchmark reflecting the variance
in agency types.
Example: Small versus large,
Independent versus Multinational.
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7. Adjusting valuation for strategic importance
• The price calculated is simply a • Apart from using the Low, Median and
process of multiplying the blended High for the type of agency, it can also
resource rate by the benchmark level be used to classify the strategic
of resource hours required by importance of the project.
resource category.
Example – Brand versus Promotional TV
Example: Account Management Hours x Commercial;
Account Management Blended Rate + • Rationally it takes the same number of
Strategy Hours x Strategy Blended Rate resources to make a brand TVC as a
+ Creative Hours x Creative Blended promotional TVC.
Rate + Production Hours x Production • However, a brand TVC will have a
Blended Rate = Price for Output. much higher level of media investment
• This calculation provides the cost of over a longer period of time.
the service but not the value to the • Therefore it is High Value and you
brand. would use the High Price.
• The promotional TVC may run for only
a few weeks and is therefore Low
Value using the Low Price.
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8. The price-based compensation model
• When implementing the price-based • On the plus side the price-based
compensation model it is important to compensation model provides many
remember: benefits to marketers and agencies
• The purpose is not to compensate when properly implemented including:
the agency for every hour of • Providing alignment between the
resource they use but to provide a marketer and the agency on the
fair price reflective of the value of strategic and financial importance
the task delivered. of each project.
• It requires clearly defining the • Significantly decreasing disputes on
expectations and requirements of resources and project over-runs.
the agency so they can manage • Allows brand teams to better
their resources to deliver these budget their project costs against
costs and time effectively. agreed fees for service.
• Inefficient processes, such as • Provides an accountable user-pays
excessive iterations of creative system, eliminating the unseen
concepts, repetitive meetings, subsidizing which occurs in many
protracted approval processes will multi-brand retainers.
negatively impact the agency’s
profitability.
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9. For more information contact…
@trinityp3 TrinityP3 Pty Ltd
Sydney
+612 8399 0922
www.trinityp3.com/blog/
Melbourne
+613 9682 6800
TrinityP3 Hong Kong
+852 3478 3982
Darren Woolley Singapore
+65 6631 2861
people@trinityp3.com
www.trinityp3.com
marketing management consultants