Large advertisers are increasingly using fixed fees to pay agencies, study says

Hershey’s famous “Holiday Bells” ad is its longest-running commercial. Created in 1989 by Ogilvy & Mather, it has become a mainstay of holiday advertising; the company runs it year after year.

The iconic ad recently caught the attention of Kristen Cavallo, CEO of The Martin Agency and global CEO of MullenLowe Group. “Now, if the agency could get paid every year the client re-airs it...Maybe Santa will grant this wish,” Cavallo recently wrote on a LinkedIn post about the campaign.

The way that agencies are paid seems to be on her mind. Her comment came days before The Martin Agency announced that it’s adding a chief revenue officer to its ranks who will be tasked with working to reinvent “how the agency gets paid for its intellectual property,” according to Ad Age.

“[Getting paid based on hours] would lead you to think that the longer you spend, the better the idea, but that’s not always the case,” Cavallo told the trade. “If we got paid more based on the impact that an idea made instead of the hours it took to make the idea, [clients] might see things differently.”

Zoom out: Cavallo doesn’t seem to be the only one thinking about agency compensation. According to a study recently conducted by the Association of National Advertisers, “marketers are using fixed, or output-based fees with increasing frequency.” The study included 101 markers representing 336 client-agency relationships.

• Advertisers relying on output-based fees determine a fee “for a specific project or set of deliverables,” per the ANA, as opposed to calculating payment based on how much time an agency spent working on something.
• The study found that 53% of marketers that spend “$500 million or more per year now employ fixed or output-based fees,” a 48% increase from 2016, when just 5% of agencies did.
• The shift “may relate to marketers who want to compensate the agency for what they produce, not the time it takes to produce it,” the report’s authors wrote.

Related, unrelated: Keurig Dr Pepper faced backlash for reportedly requiring agencies participating in its recent RFP to agree to 360-day payment terms—or secure outside financing.