Are Performance Contracts a Good Idea?

Performance Contracts Requires Answers to Targeted QuestionsShould you seek a contract with your digital marketing agency that pays for performance? It is a seductive offer. If the agency work brings you more traffic, more leads or more visitors, then the agency gets paid accordingly. Few leads, they receive little pay. Many leads, they receive big payouts! It ensures that the agency has some “skin in the game” and can participate in your success.

As an idea, the performance contract is terrific. It seems like an ideal way to ensure that the company and the agency are aligned towards the same objectives. In practice, it is much tougher to implement a performance-oriented contract then you might think. At Philly Marketing Labs, we’ve tried it a couple of times and here are some of the considerations we’d recommend in thinking about a performance oriented contract:

1) Defining performance criteria and scope.

You’ll want to choose performance criteria that meets your business goals. If you are seeking a broader awareness of your brand/offerings, then simple traffic metrics (e.g. site visits, Facebook likes, Twitter followers) might be a key metric. For our clients, we like to focus on sales and business growth so we track sales leads. Within “sales leads” you’ll need to determine what constitutes a sales lead. While a “Contact Us” form completion might clearly be a sales lead, what about a whitepaper download? How about phone calls generated by your Web site? Do you even have the ability to track phone calls generated by your Website?

Why not track sales directly? There are two reasons. First, most companies have not implemented solid lead source to sales tracking. You have to be able to follow a lead into your CRM and determine if it was closed. Second, there is often a significant delay in timing between the establishment of a lead and the close of a sale. While these can be overcome, they add to the complexity of the effort.

Getting this part right is complex but manageable. Common questions that arise include:
– what happens if an existing customer fills out a lead form?
– what happens if someone learns about us at a trade show/event and goes to the Web site? Does the lead count?
– what happens if someone fills out a lead form trying to sell something? While you probably won’t count such “leads”, you need to consider these questions in implementing a performance-oriented contract

2) How will you deal with market factors?

What happens if the market for your business receives an unexpected boost in the media? How does seasonality affect your business? When the market goes up – or crashes – are you going to reward (or punish) your agency accordingly? If not, how will you separate out market factors from the performance contract? This is tricky territory and may best be acknowledged as something beyond your control that could impact both the company and the agency.

3) How will you deal with the “lead quality” question?

Once a program is implemented, this is often the first area of dispute if it is not well thought out. Perhaps you’ve agreed that people trying to sell stuff, existing clients and spam are “out of scope” for counting leads. Fair enough. Now you receive your first monthly report and you discover that a lot of the leads are from companies that are too small for your business or they are asking for a related product or service you don’t offer. Are these still leads? Be prepared for traversing this slippery slope.

4) What mechanisms are acceptable for revisiting the performance contract?

How often will you adjust the contract? It is not practical to consider this kind of contract as “set it and forget it”. There will be ongoing conversations and adjustments. Agreeing in advance to periodic check-points for revisiting and adjusting your criteria and performance contract will save you some grief and anxiety down the road.

5) Are you going to be satisfied with the results?

A year has gone by and your leads have grown by 50%. Are you satisfied with the fat bonus you have to pay your agency for the performance? Or are you noticing that everyone in your industry grew and wondering if you would have seen this growth anyway? Perhaps you’ve also hired a superstar sales-person. Maybe they are the real reason for your growth? Can you track the agency actions to specific outcomes? Do you need to?

As you can see, there is no silver bullet for solving the question of how to structure a performance-driven contract. If the questions raised in this post are troubling to you, then a results-driven contract may not be right for you. In any case, considering these questions before entering into a performance contract can save you a lot of headaches and ensure you keep a strong, healthy working relationship with your digital marketing agency.

Private: Skip Shuda

co-founder of Philly Marketing Labs