Performance Based Pricing - The Ideal Way Forward?

The pricing model used to compensate media agencies has evolved greatly over the last three decades. The first shift was seen during the 1990's, due to increasing media costs, advertisers shifted from a commission based model to a fee based compensation model. Now the increasing competition amongst marketers, media agencies and reduction in media budgets is again leading to a change in the pricing model. Agencies such as Initiative, UM (both under Interpublic Group) are allowing most of their clients to move towards a performance based pricing model while, other holding companies (WPP, Publicis etc.) are allowing their major accounts to use the model. Performance based pricing allows marketer to receive better media placement at their current marketing budget. Utilization of this model is not growing at a high rate since the current objective of procurement team looks at bringing year on year cost savings while the model tries to incorporate higher effectiveness of media agencies. To successfully adopt the pricing model, client would have to first change their internal structure and synchronize the procurement's objectives to the organizational goals. Introduction: Media planning and buying as a service has evolved from a simple trading of media spaces in the early1900's to developing cross channel marketing solutions in today's world. During this period of evolution, the pricing models used to compensate media agency has seen a great change. Traditionally the industry used to follow a commission based model wherein the agencies were paid 10 - 15% commission for purchasing media space. This model saw a major shift in the 1990's.   Author: Devashish Bajaj