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A scalable agency solution for an ailing economy

A scalable agency solution for an ailing economy Mario Schulzke

Despite budget clampdowns and client concerns about the economy, many of us in digital marketing remain busier than ever. New pressures on agencies to take on an increasing amount of clients' marketing risk -- and increased accountability brought on by visibility to digital marketing metrics -- have traditional agencies scrambling to do things more efficiently. But beyond living leaner with fewer people and leveraging better-than-ever optimization engines for search, display, email and websites, most agencies aren't really shifting their models for the new economy.

David Shor is senior director of digital strategy at WongDoody.

Some agencies, however, have made a substantial shift -- one that has its roots in entrepreneurialism and true partnership with its clients. Though this shift can create challenges for traditional agencies that live and die by fees and media mark-up, the potential heroes in the current climate are agencies that deliver digital performance marketing (DPM) arrangements.

What is DPM?
At a high level, DPM means that clients and their agencies share revenue when earned by the clients. Whereas most agencies are still in the eyeballs business, DPM arrangements turn agencies into new sales teams for their clients. Instead of cold-calling and hiring an outbound sales staff, agencies use ad campaigns to generate leads and sales conversions. DPM teams are paid through a system that amounts to sales commissions or fees on a per-lead basis.

DPM arrangements probably aren't the best way to sell cereal and fast food (couponing is an exception), but virtually any business that operates through digital sales or handles prospective client inquiries through outside or inside sales is a candidate for DPM.

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Executed properly, DPM arrangements are nearly risk-free to clients, offer reasonable levels of risk to agencies, are highly scalable -- even in the current economy -- and can potentially be very profitable for clients, publishers and agency alike.

DPM arrangements are widely available, but traditional agencies are reluctant to introduce the practice themselves to their clients for a number of reasons:

  • They fear their core fee and mark-up business will be cannabalized

  • Their staff is classically trained around the brand rather than leads and conversions

  • Agency teams lack customer relationship management (CRM) and workflow consulting disciplines to ensure optimum conversion management

  • Lead generation firms have a somewhat tarnished image (can you say Punch the Monkey?)

  • Historical media-only focus of performance marketing companies who lack creative and development teams

  • Few brand-safe options and lack of transparency in traditional affiliate arrangements

A heyday for DPM
We expect digital performance marketing to be the fastest growing segment of many companies' marketing budgets. There are two key opportunities that make DPM more viable than ever.

First, clients will and are actually expanding their budgets when they know they're tied to performance. Second, new clients who have great products and services but are unable to put capital at risk can now come to market.

These opportunities are not occurring spontaneously. They have emerged as a result of two well-known shifts:

Inventory. Because of a significant reduction in the number of advertisers in the market and reduced budgets for those remaining, some publishers are only selling 30 percent of their inventory, with the rest being sold off for pennies on the dollar to advertising networks. So, reluctantly, media properties are willing to look at alternative revenue models to decrease their dependency on remnant sales.

Accountability. Marketers require accountability more than ever. It is hard to invest in emotional, long-term brand messaging when co-workers are being laid off to reduce costs. "Get me sales now," is heard more often than, "That was really a beautiful spot." The CMO Council reported that nearly 50 percent of all companies plan to restructure and realign their marketing departments to better support sales and drive revenue.

So, how do we make DPM work?
Start small. If you are still executing "branding campaigns" almost exclusively, then this is the year for you to identify at least one marketing initiative that can be managed in a performance-driven way. For example, if you're an airline, maybe you will start recruiting mileage plan members at a fixed cost metric. If you're a hospital, maybe you start delivering appointments through cost-per-lead media placements for one of your specialty practices, such as outpatient cancer care. If you're a university experiencing significant competition from dominant Internet players, consider starting with your executive MBA program. You get the point. How do you decide what might be a good performance candidate? The key is to understand the value of a new customer.

Determine the value of a customer. Strangely, this is a difficult question for most traditional marketers, but if you ask a chief financial officer, they may know down to the penny. Determining customer value is an exercise that needs to happen on an ongoing basis and will be refined over time. The bottom line is that every member of your marketing team should understand how much an existing customer is worth to your business.

Performance marketers effectively create their own budgets, delivering new customers at or below the target cost-per-acquisition. Repeating the process for each segmentation, we calculate the target CPA by establishing an appropriate percentage of operating margin that can be allocated to marketing.

For example, if sales of cruise-line tickets for Customer D carry a 70 percent operating margin and 15 percent is available for marketing costs, we can easily calculate the target CPA for Customer D -- for a $2,850 sale, 15 percent of 70 percent is $300. This means that we can arrange media placements for $300 or less, provided the cost is only incurred upon each sale, and is known as cost-per-acquisition media placement (CPA media).

If your business is built on generating and converting inquiries (leads), you need to calculate your maximum cost per lead (CPL), which will differ by revenue segment and by media source. For example, if your average customer acquisition cost is $300 for the Customer D segment, and you expect that your sales team will convert one in three qualified leads, your maximum cost per qualified lead is $60 ($300 times 20 percent). Performance marketers also know that many factors go into the percentage of leads that will convert -- from media type to number of qualifying fields.

Eliminate testing risk for clients. Even the most ROI-savvy marketers are used to buying online media on either CPM or CPC metrics, which means that the marketer is stuck with the financial risk. In our book, these "old school" digital marketers who are still comfortable hoping that their media vendors deliver the right number of visitors to their websites are simply willing to take on too much risk. Even the best optimization efforts --which may or may not deliver a favorable ROI -- often result in cancelled buys and significant sunk costs. In the end, legacy-buying approaches stick the advertiser with the bulk of the opportunity cost. That's not necessary anymore.

What shifted-risk media buys look like
Since media vendors ultimately know their media properties best, performance marketers need to demand that media vendors take on the on "engagement risk" (getting people to the advertiser's websites) and the "conversion risk" (delivering visitors who convert to a lead or sale). The upside for the publisher is that more advertisers will test on your content, and successful campaigns oftentimes lead to very profitable long-term relationships.

Similarly, agencies need to reduce and, in some cases, even remove the fees of their creative work and make it very easy to adjust and optimize. 

Advertisers only pay on a cost-per-acquisition or cost-per-lead basis and have the ability to scale their media spend on the media properties delivering actual results. 

Rewarding publishers
Publishers need to know that they're treated as partners, and not just commodity vendors. Performance marketers go to great lengths to establish data infrastructures that allow advertisers to be transparent about the number of leads or sales a media vendor generated. We also work hard to be protective of the vendor's audience by providing fresh offers and creative periodically, and by limiting the number and frequency of impressions so as to avoid message blindness and wasted impressions. But most of all, performance marketers must reward vendors' adoption of engagement and conversion risks by providing a real financial incentive through your partnership. Offer a compelling cost-per-acquisition bounty and reward performance through extra bonuses to ensure that your media partnerships can be a long-term, consistent revenue stream for your media vendor partners.

Once you get started with your performance marketing initiatives, efficiently tracking and optimizing your work becomes imperative to making it work. But, the steps outlined above can launch you into your first performance marketing campaign. If nothing else, there are a number of high quality performance marketing agencies that can help you get started.

The era of high relevancy
Recognizing that many publishers have enjoyed their low-risk advertising rates environment that was built on offline media buying traditions, it may be the ideal time to reshape the way publishers interface with advertisers and their agencies to facilitate practically unlimited DPM opportunities.

At the very least, publishers should try, at their own risk, many different advertisers' offers brought to them by DPM agencies. Some offers will thrive; others will fail. But publishers will emerge with a stable base of recurring revenue that connects with their customer base (as proven by the performance metrics). Website visitors benefit because publishers begin to take control of the advertising on the site to ensure that it's more relevant.

And in the end, agencies can do what they're great at: Emotionally connecting with consumers and business constituents with great creative and working with media vendors to deliver relevancy. DPM organizations will be the leaders at the forefront of the high-relevancy era.

Mario Schulzke is a principal at Quillion.

Mario Schulzke is a principal at Quillion, a digital performance marketing agency. He is a seasoned online marketer who has helped build results-driven interactive campaigns for Fortune 500 direct and brand marketers alike.Prior to helping to start...

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