How Does Revenue Sharing Drive Performance Marketing?

Any small business looking for growth needs marketing to accomplish that goal. There is only one problem: working with advertising professionals can be expensive, and is often difficult to afford on an already limited budget.

For countless startups, working with an ad agency is out of the question. Pricing models dictate minimum spends that are simply unaffordable. But what if you only have to spend money that is guaranteed to bring a positive return on investment?

It sounds too good to be true, but that's the exact pricing model marketing agencies are beginning to employ in working with small businesses. Rather than having to pay a set percentage of the marketing cost, along with an annual retainer, the agency will only get paid if its efforts will bring you revenue. Employed correctly, revenue sharing can drive your performance-based marketing.

Understanding Traditional Pricing Models

Most advertising agencies work with small businesses using pricing models that have been established for decades. They charge their fee as a percentage of costs; if, for example, you plan to spend $5,000 on a marketing campaign, your agency may charge you 15% of the campaign, taking your actual cost to $5,750.

In addition, you will probably pay for the creation of the content that drives the marketing campaign. The true cost of spending $5,000 on advertising will probably above $6,000 as a result.

An alternative pricing model for many agencies builds around retainers. The client pays a set price, perhaps around $10,000 per month, to receive an agreed-upon advertising service in return. Expenses are fixed, but completely independent of how the campaign actually performs.

What Makes Revenue Sharing Different?

That last sentence is the exact reason why traditional pricing models may not work for your small business in working with an ad agency. Put simply, you cannot afford to sink thousands of dollars into marketing each month if you don't know whether the money actually helps to grow your business.

This core shortcoming is where revenue sharing enters the equation. Instead of paying your agency money regardless of its returns, you agree to share a portion of your revenue with the agency.

As a result, your marketing partner has a tangible stake in your business growth. Rather than simply putting out ads that may or may not be successful in growing your business, you will be more likely to see a tangible strategy put into place that actually results in positive ROI.

Revenue Sharing in Action

Ultimately, revenue sharing benefits both the agency and its clients. A 2005 story in the Wall Street Journal highlighted Anomaly, a small digital agency in New York City that began to embrace this pricing model. According to one of its co-founders,

"We own [the marketing success]. If it doesn't work, then we lose out."

How successful has Anomaly been with this pricing model? A decade after the story, the agency was named one of the top shops in the United States by Advertising Age. Its clients now include big names from Hershey's to Major League Baseball.

The Rise of Performance Advertising

The process of sharing revenue with your agency can perhaps best be described by the way in which digital advertising has changed over the years. More specifically, the rise of pay-per-click (PPC) advertising is an instructive story in how importance measurability and performance has become even for small businesses.

Just a few years ago, digital ads were largely paid by the impression. Each time your ad was shown to your audience, your budget was charged. But in the age of PPC advertising, that is no longer the case.

Now, placing an ad on Facebook or Google will only cost your business money if someone is actually interested enough to click on it. Digital advertising performance has become so important that paying for underperforming ads has effectively been eliminated from the two largest advertising platforms online.

It's no surprise, then, that revenue sharing on the agency level is similarly beneficial. If you only have to pay for performance, you end up with services that are more directly optimized toward achieving that performance.

Streamlining Your Resources

As a small business owner or manager, you don't have resources to waste. In fact, money-related issues (proving ROI and securing enough budget) are among the biggest marketing challenges small business marketers face on a daily basis.

You probably don't have time to undertake marketing on your own. But the pricing models of many marketing agencies, focusing on either retainers or set fees, make it difficult to outsource your marketing efforts. Revenue sharing, then, offers the perfect opportunity to both ensure performance and streamline your resources.

Consider this hypothetical example that explains the benefit of a streamlined budget without waste. When you work with an agency that employs a retainer model, you have to come up with a set amount (say it's $5,000) each month.

Regardless of whether you need your budget for new inventory or an office renovation at a given point, it's your set marketing expense. On a revenue sharing model, on the other hand, that's not the case.

Rather than having to come up with that set budget, you simply work with your agency on the actual tactics and strategies that grow your business. By the end of the month, you calculate your revenue, and transfer a share to your agency. No budget planning needed.

Effective Reporting

Digital marketing has a data problem. Digital tactics spit out a plethora of data that can give you an idea of how your advertising efforts are performing. But how do you sort through the clutter to find the insights that are actually relevant to what helps your business grow?

Unfortunately, agencies that don't have to prove their performance in order to be paid don't always answer that question. They're happy reporting on the total reach and impressions of your ads, without delving into the type of closed-loop reporting that actually gives you insight into how many customers a given campaign generates.

Marketing agencies employing a revenue sharing model, on the other hand, have a stake in following each of your ads and leads through as far as possible. The more they can prove the success of their efforts, the more likely their fees will increase, benefiting both parties involved. Metrics like clicks, lead conversions, and customer retention rates become more important.

Taking a High-Level View

Don't underestimate the impact sharing revenue with your agency can make on long-term marketing strategy. Ultimately, each of your efforts should be geared toward a single value proposition your business can offer your audience.

Consistency is key, as each tactic should work toward the same goal using the same methods. Agencies using traditional pricing models often focus on individual tactics, leaving the creation of an overarching strategy to you.

But without that strategy, success will be harder to come by. That's why agencies involved in revenue sharing tend to focus their resources and time not just on the execution of tactics, but also strategy development to maximize the success of each of these tactics.

The Growing Importance of Mutual Stakes

The world of marketing, particularly in the digital realm, is changing rapidly. Adaptability and innovation on the side of the agency is key. And yet, a shop that only receives a retainer has little incentive to build a strategy that accounts for current trends and shifts in the environment.

Revenue sharing, of course, is not a cure-all that will magically help your business experience explosive growth. It is, however, a more accountable way to partner with an agency that can actually help you grow by increasing the stakes involved.

Given its benefits in streamlining your resources, increasing the effectiveness of your marketing reports, and taking a strategic approach to marketing, the concept might just be the ideal solution for your small business.