Navigating the Use of Performance-Related Fees in Media Agency Agreements
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Establishing the right level of performance related fees is a critical step for advertisers looking to motivate their media agencies.
Performance-related fees (PRFs) are variable remuneration paid by advertisers to media agency partners, based on the agency’s performance in meeting specific goals, targets, or key performance indicators. PRFs motivate agencies to deliver better performance and foster stronger, advertiser-agency partnerships, aligning both parties’ interests.
Thanks to a combination of challenging global trading conditions, the increasing proportion of ad spend that’s digital, an industry-wide talent crunch, and the growing importance of Retail Media, it has never been a better time for advertisers to review the performance-related component of the fees they pay to their media agency partners.
Why is now a good time to review?
To establish effective PRFs, advertisers should adhere to five key principles: Simplicity, Fairness, Motivation, Certainty, and Scrutiny. By incentivising media agencies to drive their clients’ commercial performance, PRFs help agencies become genuine business partners, fostering a culture of incremental improvement, and delivering better value for both parties.
Importance of proper PRF management
To maximise value, it is critical that PRFs are managed properly by both the client and agency. This should involve ‘in-year’ reviews so that any areas of poor performance can be identified and improved. Contract Compliance audits can evaluate agency delivery of commitments related to PRFs. Weightings need to be balanced and should not disproportionately rely on one area. It is essential to manage PRFs properly, with regular reviews and clear communication.
Proper PRF management is crucial for fostering a healthy, productive relationship with your media agency. By focusing on these key areas and adhering to the five principles detailed here, you can create a mutually beneficial partnership that drives success for both parties.