by Tim Williams, originally posted on B2B Brand Debate

It surprises most agency professionals to learn that many marketers—both consumer and B2B—are intensely interested in exploring a value-based compensation arrangement in place of the traditional hourly rate.

A recent position paper from the Association of National Advertisers states clearly:

“Traditional metrics used in today’s cost-plus compensation agreements (usually based on time) have no relationship with the external value created for the client in today’s intellectual capital economy. Therefore, pricing should instead be based on results and value created.”

In forward-thinking companies across the country, marketing, finance, and even procurement officials are actively engaged in internal discussions around value-based compensation. If the marketing services profession isn’t more proactive in this area, clients may well be the driving force behind a change in compensation practices. And that’s ironic, because almost all pricing innovations come from sellers, not buyers.

Selling outcomes instead of hours

From a marketer’s perspective, the chief frustration with the traditional cost-based compensation system is that they’re not sure what they’re really buying. Are they buying the firm’s time? Dedicated staff? A set amount of work? In the end, they don’t really want to buy any of these things; they want to buy outcomes.

In a cost-based compensation arrangement, the client pays for efforts rather than results. Agency professionals log and charge hours regardless of the outcomes the hours produce. In a value-based arrangement, marketing firms and clients identify specific metrics of success and structure agency compensation around outputs instead of inputs.

Shared interests

Value-based compensation works primarily for one major reason:  it aligns the interests of the agency and the client. Both parties are working to achieve the same things. They both have similar financial incentives. Structured properly, value-based compensation agreements can also give both parties similar risks and rewards.

Imagine how this could change the dynamics of an agency-client relationship. Suddenly, the concept of “partnership” takes on real meaning. Clients start to view “risky” agency recommendations differently, because they know the agency has skin in the game. A new level of trust and mutual respect emerges, because both parties have a stake in the outcome.

Value-based pricing is unquestionably where the marketing world is headed. The question is, who will get there first: agencies or their clients?