Coca Cola Co. adopted a new strategy to save on media budgets and hold agencies responsible for providing performance. Under the “pay for performance” plan, Coke guarantees to reimburse only what an agency has expends unless said agency can prove performance based on predetermined success measures. We, as advertisers and marketers are notorious for speaking in ROI terminology, but the proving part is a different matter altogether. Agencies currently serving the soft drink giant will not profit without delivering. If Coke successfully demonstrates this value-based model, look for other companies to soon implement the same type of programs.
Under Coke’s new plan, there are no guarantees. Which, in theory, is exactly the same method advertisers conduct business with media partners to ensure accountability for poor performance. If a media partner underperforms, it is expected to “repay” via additional media weight, no-charge advertising, and in rare cases, a refund.
Outside of the agency niche, a business transaction occurs when I say I want X, and you deliver X. As an example: I sign a contract to have my house painted. However, only half of the house gets finished, but they state that they're done. That wouldn't fly...I'd be contacting the comapny, demanding my money back, trying to get the house finished, and if necessary, going to court.
Advertising agencies have stood by the fact that intangible processes, such as creativty branding are hard to tack down with a specific return on investment dollar amount. And they're...some of what client companies receive from agencies can be classified as "art rather than advertising," and how much does a masterpiece run? I'm being facetious, but not really. Think back on campaigns that not only defined the brand, but redefined the company itself. A couple for Coke comes to mind immediately:
It's hard to price someting like that. Or even the Mean Joe. Or a revised version of the1971 spot, seen above:
Activity doesn’t equal value, or at least that’s the premise driving Coca Cola’s pricing model. However, this allows the agencies to rise to the occasion and receive more compensation than the would have, with up to a 30% “commission” if their delivery is spot-on. With Coca Cola’s worldwide budget at $3 billion, the compensation possibilities are lucrative.
How Coke's new compensation will work:
BEFORE: Agencies and Coke negotiate in advance how much profit the former will see on a given project.
AFTER: Agency is guaranteed only recouped costs, with any profit coming only if certain targets are met.
BEFORE: Agency decides what Coke should pay for a project based on the time it expects to expend on it.
AFTER: Coke tells agencies how valuable a project is based on strategic importance, whether other agencies could deliver the same outcome, and other factors.
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