Will Ad Agencies Switch to Revenue Sharing in the Next 5 Years?
Can you trust your marketing agency?
Consider this question seriously. Every client knows deep down, at the end of the day, your agency is out to make money by working for you.
That conundrum is at the core of many agency-client relationships. It also, as you can probably imagine, prevents both entities from fully trusting each other to achieve the maximum possible results.
It's not a given, though. Browse around, and you will find plenty of symbiotic relationships that can benefit ad agencies and small businesses alike.
These partners have realized only a partnership built on common goals can truly be mutually beneficial.
Pricing models that encourage this mutual goal-setting are therefore in the interest of both parties. Given the benefits of one pricing model in particular, you can expect plenty of ad agencies to switch to revenue sharing in the next 5 years.
Here we’ll explain why ad agencies should switch to revenue-share marketing and how that can benefit your small business.
Understanding Revenue Sharing
In a previous post, we've discussed in-depth how revenue sharing models have begun to alter the ad agency landscape. At its core, it's a system in which instead of receiving a set fee or retainer, the agency shares in the revenues generated through its marketing campaigns.
Small businesses can benefit from this type of pricing model in a variety of ways. Above all, teaming up with external marketing professionals becomes more affordable and accountable. But as it turns out, agencies can derive just as many benefits from the same concept.
How Revenue Sharing Can Improve Quality of Work
As a small business owner or manager, what is your goal in working with an external marketing team? The answer is probably pretty obvious: to increase brand awareness and grow your business. You can only achieve that goal, of course, with high-quality marketing initiatives.
On average, we are exposed to more than 350 ads every single day. But we only actually notice about 153 of them, pointing toward the degree to which our brains are saturated with promotional messages.
To stand out, especially as a small business that doesn't have a huge budget to throw at your target audience, you need quality marketing. Through working with an agency that engages in revenue sharing, you can achieve that goal.
Ultimately, the reason is simple: the agency will do the best work they can. The better their marketing output, the more your revenue will be effected, and the more they have to gain.
The Motivation of Team Members
For the same reason, team members at advertising agencies tend to be more motivated if they know a revenue-share model is in place. As is the case in any business, revenue trickles down. If the agency makes more money, the employee will see more tangible and intangible benefits.
The tangible benefits are obvious, but their intangible counterparts merit further discussion. Consider the daily work of a marketing professional at an ad agency. Working under a retainer-type model, that employee has little incentive to do their best work.
Within a revenue-sharing model, on the other hand, the sense of responsibility increases dramatically. The reason: a significantly increased need for accountability.
Encouraging Accountability and ROI-Focused Marketing
As mentioned in our introductory post on revenue sharing, the pricing model can have a significant impact on the reporting and ROI-focused communication between agency and client.
For small businesses, that means a better understanding of what marketing can actually do to grow revenue. But for agencies, the benefits of this increased accountability is just as important.
Measuring the return on investment of digital marketing, particularly content marketing, remains one of the top challenges for businesses across industries. And it matters just as much for agencies.
There is a reason closed-loop reporting has increasingly gained popularity among marketing professionals.
If you can track the result of your advertising campaigns all the way to customers, you have a better idea of what works.
That knowledge, in turn, will benefit both your clients and your own marketing efforts.
The result is an increased focus on conversions instead of exposure. Instead of measuring the reach of your Facebook campaign, for instance, you determine how many customers that Facebook campaign actually gained.
Because of revenue sharing, that information is vital for your clients and your own revenue. Long-term, the increased degree of accountability will make everyone in the agency a better marketer.
Building Better Client Relationships
Through revenue sharing, the adversarial relationship of agency and client takes on a more conciliatory shape. Both entities have the same goal, relying on the same revenue sources for success.
As a result, it's significantly easier to develop a mutual sense of trust. It's easy to distrust your marketing agency if they are ultimately not accountable for actual results. But given the above-mentioned sense of accountability thanks to revenue sharing, it becomes a non-issue.
As you might imagine, advertising agencies cannot rely on one-off projects to drive their revenue. The recurring revenue of each client is crucial, helping to build consistent income that leads to long-term growth. Working well with clients increases the chances of long relationships that maximize recurring revenue.
Mitigating the Risks of Revenue Sharing
Thanks to the above benefits, revenue sharing has the potential to be the 'next big thing' for marketing agencies. Still, there are some risks that are important not to ignore when switching to this pricing model.
The first risk in revenue sharing is a problem of attribution. Put simply, you don't know which marketing tactic ultimately led to a customer conversion.
Exposure to a Google ad may have done the trick, but if the customer converted days after seeing that ad, you may not know whether that was the case. As a result, the agency's share of client revenue can suffer.
Mitigating this risk is best done through advanced analytics and attribution models.
Multi-channel attribution, for example, allows you to estimate how each audience touch-point contributed to a customer conversion. The result is a more comprehensive picture of what it took for a member of your target audience to convert.
Retail companies will naturally see their revenues increase during the holiday season. Should the agency benefit from these increases in revenue (and suffer from the reverse effect), even if it has little to do with marketing?
It's a difficult question to answer, but one that a productive client-agency relationship will depend on. One potential solution is to predict sales in year-over-year comparisons, and adjust the revenue share accordingly.
You can, for example, set up a 'baseline' of sales for given months that won't be touched by the agency. Only the profits gained above that baseline is subject to shared revenue, ensuring a more accurate estimation of marketing's impact. You should, of course, work with your agency to ensure everyone is on board with the same plan if taking this route.
Achieving Natural Trust
Can you trust your marketing agency? When working with an agency that engages in revenue sharing, the answer becomes obvious and almost redundant.
Of course you can trust a collection of professionals who have a stake in working toward the same goals as you.
And given the above benefits of this pricing model for all involved parties, we expect revenue sharing to only grow among ad agencies in the next 5 years.