Base Ad Fees on Business Model

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I got a call from a reporter recently. She was researching performance-based fees charged by agencies, and asked whether I had an opinion on the subject as founder of an online ad agency doing business since 1996, otherwise known as The Dawn of Time in Internet years. That interview got me thinking about how performance fees relate to the brand-direct concept I have been talking about since then.


As readers of this column know, I frequently espouse the belief that branding and direct response marry well online. I have been mulling that over lately, trying to refine how this mix can lead us to effective pricing models. The relative importance and balance of your branding and direct response goals depend upon your company's position in the market.


If you are a small niche distributor, then branding online will not make much sense. Nevertheless, small companies get residual benefits from brand development.


For a niche company such as Djangos, Portland, OR, a small store selling new, used and collectible records, selling records is the main goal online. But now, with an online presence, at www.djangos.com, the company can grow in different ways to develop its own image and brand for a larger-than-local audience. It has extended the reach by buying several national independent, profitable record stores and integrating its online brand within them. By acquiring companies already profitable in the space, Djangos gets into that customer base and generates awareness of its brand in a new way.


That can work the other way as well. If you are already a Proctor & Gamble-type brand, branding likely will remain your strongest tool online. If P&G wants to do an online direct marketing push for Pampers, it can work well, but the resulting sales may be secondary to the benefit of extending the brand online.


Opportunities exist for branding through online direct response mechanisms. If the pitch is memorable and the creative bold and evocative, a distinctive company can derive significant brand building online.


But because of the ways in which the online economy has changed and tightened, dollars are fewer and must go farther. As more companies follow the path to profitability, realizing the real need to make revenue online, a trend toward performance-based fees will follow. Wherever a measurable metric exists, that is where the spending money will be headed.


Agencies that exploit this can find good incentive in a performance-based model. But to perform to its maximum potential, the agency must have enough control over the creative process to devise strategic banners, landing pages and other creative assets and place media buys where it can succeed. That can mean taking risks, and "risk" is a scary word in this climate.


In terms of fees vs. incentives, a responsive agency seeks the arrangement that best allows it to communicate with a client as a partner. For everyone's confidence, under such a model, a good reporting system becomes crucial. Defining the actions you will track is paramount as well, and the right choice is not always obvious. A credit card company, for example, could base a cost-per-action model on a completed application or card approval.


Site publishers are getting squeezed, too. They prospered for several years, benefiting from advertisers' lack of understanding about the importance of an end result, details like whether the lifetime value of a customer was a good deal at $10 or $100. Advertisers are savvier now, and understand that they have to balance their needs with a fair fee that ensures the site publishers' existence. Advertisers and publishers have to be cognizant of the other's needs and business.


In 2001, payment models and choices will remain dependent upon a variety of factors, including the type of business and goals of the campaign.


If you are a larger offline brand, again, your strategy likely will be more broadly focused. You can reach a large mass market online with less --expensive media buys, but consider targeting creative to several different subgroups or focusing on several different products in your line.


But if you are a company that makes snowboard wax, you may do better to buy slightly more-expensive niche space online, where your potential buyers may be easier to target than offline.


While performance-based fees will become more prominent in the landscape of online marketing, I predict that more clients also will begin to sense the intangible, refreshing value of branding and awareness that will pay big dividends in future sales and the best kind of advertising: word-of-mouth.


• Mark Grimes is founder and president of online advertising agency eyescream interactive inc., Portland, OR. Reach him at grimes@eyescream.com.

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