Don’t pay for the drill (product-based), or even the hole (service-based), pay for hanging the picture on the wall (outcome-based).
This is the simplest example I can find of a new trend emerging in business called the outcome economy, or outcome-based models.
At Xaxis we have declared our position as ‘the outcome-driven media company’. Our movement from an ‘audience company’ spoke to the understanding that audience targeting is a means to end. The real goal is an outcome that has value to our advertisers.
To reengineer this phrase in a media-centric way: don’t pay for the media strategy, or the ad space, pay for the benefit to your business.
Within the product and services sector it had became clear that effort-based time or material cost models, or even output-based fixed-fee models, were not satisfactory in meeting business needs.
The economic downturn in 2008 meant consumers and businesses simply wanted results, and they wanted assurances of those results. So to win customers, companies accepted the responsibility of effectiveness. As firms developed expertise and chose to share and shoulder risks, an outcome-based economy developed. In fact, Forrester estimates that currently about 10 percent of all existing business contracts are outcome-based engagements.
The benefits seem obvious to the client. They reduce their risk of buying something that does not deliver the result they wish. They get predictability of results and can plan their business more effectively in terms of investment and expansion.
However, the benefits to the supplier are less clear and seem fraught with risk. Despite the risk, suppliers are still willing to take on the challenge to achieve differentiation versus competitors, to decouple pricing from head count or from the normal market standards, and most importantly, to exceed expected results and achieve higher profit. But what really enabled this global change?
Quite simply, the digital wave of development is the main driver. Just as the industrial wave enabled automation, changed workforces, built and sunk companies, we see that digital too has enabled many factors that contribute to the growth of the outcome economy.
An increase in computer processing power. Until recently we couldn't process sufficient data to make solid predictions about outcomes. The recent growth in computational processing power has been immense.
Matching expanding data, our algorithms have become more efficient and can now make more accurate predictions.
Cloud computing has enabled storage of huge data sets beyond what was physically possible at a machine or company level.
Analytics and visualization have improved. Software has made data readable and actionable, meaning companies are more confident in taking on responsibility. Risk can now be noted, calculated and ultimately mitigated at each stage of the process.
Connectivity—or, more broadly, the internet of things—gives companies the ability to do all of the above in real-time, with information stemming directly from their connected workforce or their hardware.
Case in point, Rolls Royce jet engines, through built-in sensors, can predict engine problems before they occur. This means they can offer ‘power by the hour’ solutions and only charge their clients for engine ‘up time’.
As digital marketers it is obvious that we are quickly embracing technology, tracking, data access, and visualization. But for me, the real obstacles in embracing outcome-based models are in other areas.
Alignment of goals: Both client and company must have a clear understanding of what is truly valuable. In digital media this remains an issue. We speak the language of media outcomes like views, clicks, lands, and leads, but the advertiser is often thinking about their overall business sales from both on and offline worlds. They might also be more interested in market share or brand health.
There is misalignment of client outcomes with our digital media currencies. This situation needs to be understood and over time marketing companies like Xaxis will use computational power and machine learning to model media outcomes on real business outcomes.
Agreement on how to monitor success: how are the outcomes measured or counted, who is responsible for this tracking, and does this source dictate ultimate payment? Given the myriad examples of incorrect measurement and tracking by suppliers themselves, we at Xaxis support the use of an independent third party.
Understanding that products and services must be bundled together: Delivering an outcome requires complete mastery and control of the supply chain. This means hardware, technology, materials, service, and data. To succeed in our market, ad suppliers must offer fully bundled packages and ensure all parts work together seamlessly.
An open relationship: If the supplier company takes on risk to deliver the outcome then clients must be open to change. They need to give full and regular insight into their business.
This is especially critical when advertisers ask for a guaranteed number of on-site actions, especially sales. In this case, there should be complete disclosure of data like time, weather, competitor activity, strength of the offer, pricing, and page load times. Unless there is an understanding of these uncontrollable variables, outcome commitments are difficult to make.
A fair negotiation: Negotiation shouldn’t be simply one-sided, the classic “supplier please give me your best offer”. We must aspire to a fair and sustainable deal for both sides where risk, commitment and rewards are aligned.
So often media suppliers are asked for a projection on performance for new client campaigns, when in fact the advertiser is well aware of previous benchmarks or existing on-site performance via their site analytics tool. They ask because they are fishing for a low offer. This only seeks to harm the supplier. The best outcome-based models work as a fair and achievable deal for both sides.
A sensible risk versus rewards conversation: If an outcome is offered and committed to by the supplier then this offers reduced risk to the company or advertiser. Advertisers must understand that if supplier performance improves, the goal will be achieved using less media volume than previously estimated at the time of the agreed deal.
Money will be saved, and it will go the supplier, not the client. For an advertiser who is very confident in their product, offer, price, lack of competition or on-site conversion rate, a guaranteed outcome may not be the best idea.
They may simply buy ads believing that they will perform well, and the cost per outcome will be lower than the supplier could commit to up front. Advertisers need to deduce if they are confident enough to take the risk, or if they want to pass it to the supplier.
Setting a price: when determining the price of the outcome the advertiser should acknowledge the concept of ‘risk surcharge’. If the best cost per outcome is based on perfect conditions, then for a company to continually guarantee this going forward is unrealistic.
A more sustainable cost per outcome would likely be marginally higher—a risk surcharge, or buffer, if you will. This is fair and seeks to ensure outcome-driven deals are sustainable for suppliers.
- Trust and credibility: Offering an outcome-based model is one thing, being trusted to deliver it is another. To convince a client you are the right supplier requires relevant case studies and a transparent history.
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|Richard Pollin is vice-president of client development, APAC at Xaxis|