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Pay for Performance Agreements – The Devil Is In the Detail

A prior blog entry highlighted the rise in third-party vendors that disseminate brand messages and content to their HCP members with the goal of driving incremental revenue and ROI. In an effort to demonstrate their value and gain a foothold with brands, many of these vendors propose pay-for-performance, or shared risk agreements. Sounds great, but knowing whether or not these agreements make sense for a particular brand or program requires close attention to detail and recognition that the effort may not be warranted, given the amount of money at stake. 

Risk-share agreements that we’ve encountered offer up a variety of incentives:

  • No payment unless the program achieves a pre-defined ROI (or other metric)
  • Refund if the program fails to achieve a pre-defined ROI (or other metric)
  • Payment milestones tied to achievement of performance targets
  • Additional promotional activity at no charge if performance targets are not met

Regardless of the incentive, brands must closely evaluate the amount of money that is actually being protected by the risk-share agreement. Too often, we’ve seen brands accept the terms at face value, or assume that their procurement teams will run the calculations and determine the practicality of the risk-share. Unfortunately, this isn’t a wise course of action as the procurement teams are unlikely to have nearly as much knowledge and understanding of the program construct. In one example, a program failed to achieve its goal by more than 50%, yet the brand was only able to shift a minimal amount of risk to the vendor, ultimately paying more than 80% of the contract’s value. Unfortunately, this was not evident to anyone up front. 

To the extent that a vendor will promise to continue promoting the program if it fails to achieve its goal, make sure you understand how this translates into value – the value of the vendor’s investment, which may be nominal if there are time limits on the free promotion, and the value of the additional promotion in terms of incremental revenue. Consider, will an additional 3 months of promotion allow the brand to realize its original goals? 

Assuming that you have a clear understanding of the amount of investment at risk, the next hurdle is establishing a valid and reliable measurement methodology that can be used to establish attainable performance targets and determine program outcome. This is perhaps the most important component of a risk-share as it is an opportunity to force transparency upon the vendor. Vendors will usually apply a number of assumptions (opens, clicks, engagements) to arrive at a performance target. It is incumbent upon brands to understand all of the moving parts of a particular program and how they contribute to the ultimate goal – revenue. It is easy for vendors to mitigate their risk by maintaining a black box, so close scrutiny of all assumptions is imperative! This is especially important when the vendor offers to extend the promotion period at no cost if the original goals were not met. Rigorous evaluation of program assumptions will help shed light upon the likely effectiveness of the additional promotion. 

Some final considerations:

  • Knowing ahead of time that risk share agreements require a fair amount of time and resources to develop, it is worth stepping back and determining whether or not the amount of money at risk justifies the effort. 
  • Similarly, always consider opportunity costs. When making tradeoffs between different investment opportunities, don’t simply default to the program that offers a risk share. Be sure to consider customer channel preferences, strategic fit, and expected financial return.   
  • Lastly, never lose site of the customer. Every risk-share agreement must have explicit terms that prevent vendors from spamming the brands targets in order to meet pre-defined performance measures. Ultimately, the brands must ensure that they do not lose control of the customer experience. 
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