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It’s Just a Bunch of ROI, with Direct Response – Clue in Your Agency

Who has the greatest interest in ROI?  Who has the most at stake when it comes to advertising online and direct response advertising?  With regard to actual investment of dollars and common sense, is it the agency or the advertiser?  Who has the most to gain and who has the most to lose?

At the advertiser level, the importance of ROI is more obvious.  Sales are responsible for generating revenue and are supported by marketing who generates product or service demand.  Those people bear the burden of modeling programs that generate leads and attain a cost-per-lead (CPL) at an ever-decreasing rate.  Whether they do it in-house or they employ an agency, they are striving to drive the CPL down in order to support a growing revenue demand within the company.  So there is the motivation.

ROI is a product of the CPL or the cost-per-acquisition (CPA) over total investment made.  Different buying models come into play for different media with respect to online as we all know – CPM (impressions), CPC (clicks), CPL (leads) and CPA (acquisitions) – but for the advertiser it’s all about turning the dials to generate the demand so that sales can drive up the revenue.  Total investment made is the BIG picture (creative, expenses, R&D, technology, personnel, etc.)  The advertiser evaluates its marketing team based on its ability to generate an increasing return on the investment made.

Okay so B-school lingo aside, what is the marketing person’s motivation?  Is their compensation somehow tied to their ability to drive the ROI in a positive direction?  Well, probably not.  Maybe it should be.  But there are probably other incentives in place that motivate this individual to focus on this number pretty strongly.  Quarterly goals, etc.  Its in there.  Because to most people who own the marketing budget at an advertiser, ROI is a very personal figure.

So, why would an advertiser use an agency?  They are increasing the investment right?

If an agency is employed, the advertiser’s investment in the process becomes that much higher.  The decision to bring an agency into the mix is a calculated one.  The return has to be strong as a result of the agency’s involvement because performance must now also overcome the increased cost of the agency’s involvement.  A solid agency will bring competency and expertise to the table that the advertiser simply does not have.  But this needs to extend beyond the senior ranks and the business development team of the agency. 

At the agency level, ROI is also about the client’s ability to attain a desirable CPL or CPA.  But this figure is not necessarily internalized, it’s not personal.  This is a figure that is set by the client and it is the agency’s job to achieve it.  But when you dig into the agency, beyond the senior ranks and into the file you don’t find the same level of passion.  Not always anyway.  The agency does strive to meet the defined CPA, as they want to keep the client’s business, but they don’t necessarily shoot above and through the ceiling.  They don’t shoot for the ROI objective that the client holds dear.  See the difference? 

The agency is not compensated based on its ability to meet the advertiser’s ROI objectives.  It is compensated by it’s retainers and service fees and commissions.  There is no vested interest by the agency to drive the CPA or CPL lower and lower.  There is no incentive to improve the ROI, only to meet the defined CPA/CPL.  The only incentive that exists is to do what is necessary to keep the business and perhaps garner more budget dollars from the client. 

So do we change how an agency gets compensated when working with a direct response advertiser?  Maybe.  Maybe what needs to happen is direct response advertisers need to examine how they align the way they compensate agencies with their long-term goals.  Of course an agency will still want its commissions, retainers and fees, but a solid advertiser will negotiate a position for itself that rewards the performance it desires most.  Do they want their agencies focused on CPA and CPL or do they want them focused on the larger picture, on ROI?  Maybe its time to bring the agency into the fold and reward them for attaining your goals as an advertiser.  Clue them in.

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