Exploring the Practicality of Performance-Based Agency Models in Franchising

In this episode of the Vera Shafiq podcast, Vera explores the concept of performance-based agency models within the franchising world. She discusses whether franchise brands can effectively compensate marketing agencies based on the tangible results they deliver. 

Vera discusses the appeal of this model for greater accountability, budget-friendliness, and simplicity in communication with franchise owners. She also highlights the perspectives of agencies, covering data transparency concerns, baseline costs, and variables beyond their control. 

Practical steps to implement this model, including defining KPIs, ensuring data integrity, and establishing a hybrid fee structure, are examined along with the pros and cons of adopting a performance-based model. 

Vera concludes with insights into how this approach can align interests between franchisors, franchisees, and agencies when managed correctly.

00:00 Introduction to Performance-Based Agency Models

00:56 Understanding Performance-Based Compensation

02:48 Agency Perspectives on Performance-Based Models

04:54 Implementing a Performance-Based Model

09:07 Pros and Cons of Performance-Based Models

10:49 Conclusion and Final Thoughts

Transcript

Vera Shafiq: 0:12

Hello and welcome back to the Vera Shafiq podcast, real and relevant discussions on all things business, marketing and technology in franchising. I'm your host, Vera Shafiq, and today we're going to talk about performance-based agency model, and does a performance-based model actually work? In other words, can franchise brands effectively employ a compensation structure where their marketing agency only gets paid? Or it gets paid more when they deliver real measurable results. We'll talk about the practicality of this approach, the perspectives from agencies themselves, and the pros and cons of going down this path. Let's dive in. So a performance-based agency arrangement is exactly what it sounds like, the franchisor or sometimes even the franchisee at the local level. Compensates an external marketing agency based on specific results or KPIs. It could be cost per lead, cost per acquisition, sales volume, revenue share, or any other well-defined metric. The appeal is pretty obvious. Why pay a monthly retainer or a big management fee when you can ensure that you only pay for the outcomes? In the franchise world, this idea is attractive for several reasons. So number one would be greater accountability. You want your agencies to have skin in the game, right? If they don't deliver, they don't get paid the big bucks, and that can really sharpen an agency's focus on your top priorities. Secondly. A performance based model can be budget friendly. Franchise brands, especially emerging ones, often operate on tighter marketing budgets. And so paying for results can feel safer than that flat retainer fee might feel. And the flat retainer fee may not even generate an ROI, depending on what the performance looks like. And then thirdly. There's a simplicity with a performance based model when you communicate with your franchise owners. So when you go to your franchisees and say, we are only paying the agency for actual results generated, it can actually help justify marketing fund expenditures. Franchise owners hear that message and feel more comfortable investing, but does it really work as seamlessly as it sounds? Let's take a look at the realities of this model, starting with how agencies themselves view it. Most agencies, especially those that specialize in franchise marketing, understand the unique challenges of multi-location marketing. On paper, it sounds great for them to say, yes, we'll put skin in the game. But in practice, agencies often have quite a few concerns about this performance-based model. The first one is data transparency and control. To be paid on performance, the agency must track leads, sales or revenue, and that means that they need reliable data sources and full clarity on what's happening at the store or the local level. So if franchisees are slow to update lead statuses or close deals off the books, it can create data gaps. And agencies can be very wary of situations where they're responsible for results, that they can't fully track or control. Secondly, there's the baseline costs and overhead. Performance-based billing alone may not cover an agency's core operating costs, especially early on. Many agencies will want at least a partial retainer or a minimum base fee to ensure that they don't operate at a loss while campaigns ramp up. And then there's the topic of agency expertise versus variables out of their control. So even the best marketing cannot fix deep operational issues at a franchise location, such as poor in-store customer experience, or unmotivated staff Agencies can drive leads or foot traffic, but if the local franchisee doesn't convert them, the results based model can make the agency look bad or underpaid. So in short, while agencies can be open to performance based models, most will push for a hybrid arrangement, some kind of retainer or percentage fee, plus performance incentives once goals are met. All right. Now let's talk about how you'd actually get a performance based model off the ground in a practical franchise focused way. Firstly, you wanna define clear measurable KPIs, right? Sounds like a no brainer, but you really need to agree on the right metrics with your agency. Are you paying for leads, qualified leads, sales conversions, or just overall increases in revenue? For a performance based model to work, you have to get incredibly granular and define it all upfront. Then you'll often need a baseline period of historical data to understand your normal lead volume or sales. This helps you figure out how the agency's efforts are moving the needle above the norm. For the performance based model to work, you'll also want to establish data integrity and reporting. And part of that will be your tech stack integration. So you'll need a robust system, a CRM or call tracking or e-commerce platform that tracks every lead from first click to final sale. The agency must have full access so that performance is transparent because if you're gonna be judging the agency on something like revenue. Or sales. It's obvious that technology needs to be there in order to measure that so that an agency can actually deliver on their promise, right? Then you're gonna need a consistent reporting cadence, so weekly or monthly sync ups to make sure that the numbers are accurate and that any anomalies, like mislabeling of leads or missed calls are flagged quickly. Okay? And so then you'll want to create a hybrid fee structure, because that's typically what agencies are gonna wanna do. And that would be either a base retainer plus a performance bonus, or a percentage based fee, plus a performance bonus. This is the most common approach, and let's say you pay the agency a smaller monthly retainer to cover core services like campaign setup, optimization reporting, and then on top of that, a performance bonus if they exceed a certain lead volume or conversion rate. Another variation could be a tiered payment where payment tiers could kick in once certain thresholds are passed. For example, the agency earns a 10% bonus if lead volume is 10% above baseline, a 20% bonus if lead volume is 20% above baseline, et cetera, et cetera. And then you'll wanna account for franchisee variation. So not every franchise territory is the same. You've got your urban versus your rural. Your competition levels, demographics differ across different locations. They all matter, and so we wanna make sure that the performance goals or baselines reflect the reality of each local market. Then again, with the franchisee variation, you'll want clear communication with franchise owners so that they can understand exactly how the agency is incentivized, how leads are tracked. What their role is in converting leads or reporting back, finally, you'll want to create a legal or contractual type of clarity. So you'll need to define what counts as performance. Spell out how you'll define and validate each performance metric in the contract. Do phone leads count only if they meet a certain criteria are repeat customers included or excluded, things of that nature. And then termination clauses. So if the agency fails to meet performance targets for multiple periods, or if the franchisor fails to fulfill some part of the data requirements, how can either party exit the agreement without too much friction? And then finally, as part of legal and contractual clarity, confidentiality, and data use. So franchise systems often have sensitive local performance data. So make sure your contract covers how that data can or cannot be used outside of your brand. So with these steps in place, you really increase the odds of a performance based approach running smoothly, but that doesn't mean it's foolproof. So let's examine some of the pros and cons of that performance based model. Let's look at the pros. So with a performance based model, you have an alignment of interests. The agency only makes real money if they generate results. The brand and the agency are working towards the same goals. There's a reduced financial risk. So instead of sinking a huge retainer each month, you pay according to ROI, helping you manage costs more Predictably, and I think this is probably the most important, is you get easier buy-in from franchisees. Franchise owners appreciate the idea that the agency just can't take the money and run It often makes them more open to participating in the local marketing program. Okay, so what are the cons of a performance based model? If a location doesn't convert or follow up with leads, the agency may not meet performance benchmarks and tension can then arise. If the campaign does really well, the performance fees might cost you more than a traditional flat rate, especially for high value leads and. Honestly, you need bulletproof tracking systems. So I think this is really the biggest hindrance to successfully implementing performance based model is if you don't have those tracking systems, then you're not gonna be able to measure true performance. So a single missed data feed can break the entire performance model and lead to disputes. For a franchisor, the ideal might be a best of both world scenario, a stable retainer or percentage management fee, plus performance bonuses protected by carefully defined data tracking. So does a performance-based agency model actually work? The short answer is it can if you have the right tracking mechanisms. A clear contract, local buy-in from franchisees and an agency that embraces the accountability. It does demand upfront effort to set up data transparency and define the right KPIs and ensure that local franchisees consistently do their part, particularly when it comes to lead follow-up. But when managed properly, it creates powerful alignment between a franchisor, franchisees, and the agency. That's it for today. As always, thanks for listening. I hope this episode gave you some clarity on whether or not performance-based agency fees could be a fit for your franchise brand. If you found this insightful, please subscribe, share the show, and leave a review. I'd love to hear about your experiences, whether you've tried performance-based marketing or are considering it. Until next time, keep innovating, keep track of those metrics, and stay focused on making marketing work for your brand, your franchisees, and your customers. I'm Vera Shafiq, signing off.