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Performance-Based Marketing Pricing Model Explained

The performance-based pricing model is the most suitable option in the current age of measurable outcomes in digital marketing. Linking agency compensation to specific results increases accountability, transferring more risk to the agency.

Keep reading further to explore the pros and cons of performance-based contracting. Later, we will discover how this result-driven pricing package can impact digital marketing.

Pros of Performance-Based Marketing

for the agency

for the client

  • Higher Earnings: Delivering excellent results can yield more significant compensation than other pricing models.
  • Alignment: The results are better aligned since the agency and the client have the same goal.
  • Showcasing Expertise: It’s an opportunity for agencies to put their skills on display, demonstrating confidence in their abilities.
  • Competitive Edge: This pricing model can differentiate an agency in a saturated marketplace.
  • Pay for Performance: Compensation is tied to actual outcomes, often leading to a more favorable ROI.
  • Shared Risk: The Agency now has skin in the game and will do what it takes to deliver results.
  • Trust in the Agency: If the Agency is willing to work based on performance, they trust their abilities.
  • Potential Cost Efficiency: Clients might pay less in low months, aligning with performance outcomes.

Downsides with Performance-Based Pricing

for the agency

for the client

  • Unpredictable Revenue: Agencies might face months of reduced earnings if performance targets aren’t met.
  • Dependency on Client Inputs: Factors outside the agency’s control, such as the quality of products or services, can affect a healthcare marketing company’s performance.
  • Increased Pressure: The urgency to consistently perform can intensify stress, possibly affecting decision-making.
  • Potential Higher Costs:  If performance exceeds expectations, the client will pay more than retainer pricing.
  • Transparency: The client must communicate with the agency to avoid disputes on metrics and attribution.
  • No Long-Term Thinking: If the Agency is only concerned with next month’s sales, it won’t make the long-term moves needed to scale the company.

Risks vs. Rewards of Performance-Based Pricing

for the agency

for the client

Risks

  • Potential Revenue Dips: Failing to achieve targets can result in lowered earnings.
  • Transparency Issues: Continual requests for more precise metrics might strain the client-agency relationship.
  • Higher Costs: If hired the wrong agency the end deliverables might not be satisfactory.
  • Cutting Corners: Some agencies might resort to hasty, less strategic moves to meet targets.

rewards

  • Higher Earnings: Exceeding expectations can lead to higher income.
  • Strengthened Trust: Shared risk fosters a deeper, more collaborative client relationship.
  • Alignment: A performance-focused agency will have objectives in sync with the client.
  • Improved ROI: While agency costs might rise, it reflects an overall revenue and business outcomes boost.

When is Performance-Based Pricing Ideal?

Performance-based pricing is ideal for industries with clear and measurable outcomes, such as lead generation, sales, or app installs. It can be a very effective model when a strong level of trust is established between the agency and the client.

When is a Performance-Based Model a Bad Idea?

Performance-based marketing can be ineffective in certain situations. For example, when success metrics are unclear or difficult to attribute to the agency’s work or when the agency lacks transparency and cannot provide insights on the results achieved after providing the KPIs.

A Performance-Based marketing
Example in Action

Client Profile

VitalityClinics, a nationwide network of Erectile Dysfunction treatment centers, aimed to expand their patient list.

Performance-Based Pricing Proposition

  • Lead Valuation: After analyzing VitalityClinics’ historical data, it’s determined that each patient signing up for a treatment plan generates $2,000 in revenue for the clinic.
  • Compensation Structure: Roman. Agency and VitalityClinics agree on a 15% commission for each converted lead. This means for every patient that signs up after being directed from the campaign, Roman Agency earns $300.
  • Lead Tracking and Verification: A robust CRM system is implemented to track leads generated from the Google Ads campaign. Each lead is tagged for source attribution, ensuring conversions are accurately attributed to the campaign.
  • Google Ads Budget: The total is $100,000 for the year, with VitalityClinics and Roman Agency contributing $50,000 each.

Benefits for VitalityClinics

  • Pay for Performance: They only pay for measurable performance, ensuring marketing spending directly correlates to revenue.
  • Optimized ROI: The agency’s incentives align with performance, ensuring strategies are optimized for conversions.
  • Budget Efficiency: Sharing the ad budget ensures both parties are invested in the campaign’s success.

Benefits for Roman Agency

  • Higher Earning Potential: A successful campaign with a 15% commission can yield significant earnings.
  • Shared Risk and Reward: Contributing to the ad budget ensures alignment with the client’s objectives, while the potential rewards justify the investment.

Roman Agency's Google Ads Boost: $2.4M Rise for VitalityClinics

Roman Agency has developed a comprehensive paid ads campaign to attract target audiences for VitalityClinics. Their expertise ensures that the $100,000 ad budget is used efficiently, generating substantial leads.

By year’s end, 1,200 leads converted into actual patients, resulting in $2.4 million in revenue for VitalityClinics. From this, Roman Agency earns a commission of $360,000 (1,200 patients x $300). Considering their initial investment of $50,000 for the ads, their net profit from the campaign stands at $310,000. 

The performance-based pricing model combined with shared ad investment proves mutually beneficial, with both parties witnessing tangible gains from the campaign’s success.

Final Insights from Roman Agency

The VitalityClinics campaign highlights the benefits of performance-based pricing in medical marketing. It’s a story not just of shared risks but of collective rewards. This model showcases the synergies of aligned objectives, expertise, and trust.

If you’re interested in learning more about how performance-based pricing can boost your digital marketing efforts, let’s talk!

Contact us today
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roman zelvenschi
chief storyteller

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