FEATURE27 September 2010

Coca-Cola VP says pay-for-performance is on its way

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Coca-Cola’s vice president of marketing strategy and insights Stan Sthanunathan caused quite a stir at the opening of the American Marketing Association’s Marketing Research Conference in Atlanta today – not least with the news that he plans to get his market research suppliers to work on a pay-for-performance basis.

In advertising circles it’s not a novel concept, but in research it’s been unheard of – at least until now. As we were following his talk via Twitter, we were left hungry to find out more. Why is Coca-Cola doing it? Why now? And how will it work?

Research managed to catch up with Sthanunathan soon after his session had ended. Here’s what he had to say.

For the benefit of those not in attendance, can you recap what you said relating to pay-for-performance?
What I said is that nobody should take profit for guaranteed. Brand marketers don’t take profit for guaranteed. If your product doesn’t meet expectations you get penalised. We can’t go out and tell our consumers: ‘Look, I spent so much money on buying this ingredient and that ingredient, and I spent so much money on marketing – I deserve a profit’. Why shouldn’t it be the same all the way down the value chain? That’s the thinking behind it.

Yes, it is going to be an uncomfortable journey for us and our agencies but we genuinely believe it is required. We have done it with our creative agencies, and if it can work with creative agencies, why not with research agencies?

The key is to define what performance is. If you link it to profit and volume and share and so on, that might be a bit unfair to the agencies, because there is a lot that goes on between what an agency delivers and what happens in the marketplace, so you can’t be holding them responsible for a poor [market] outcome. So, the definition of performance is very crucial, and when we start working with people in this way we’ll define that in a way that is comfortable to us both.

So no examples as yet?
No, this is a journey we have just started on. We’ve spoken to a couple of our partners and they are on board, but its going to take some time.

I can quite understand the benefits of this model to the end-client, companies such as yours. But would you say there are advantages here for suppliers?
Absolutely. They can make much more money – if they do a really good job.

What prompted you down this road? Is it purely a cost/return thing?
No, no. In the context of the whole presentation, the focus was all about change. The reality is I cannot change if my agencies don’t change. I cannot change if my agencies don’t support me. I cannot go and tell my people internally that I have changed without a proper backup system. So unless everyone raises their game we will not be the change agents within the company.

What’s in it for [agencies] today to change the game? Practically nothing. No risk, no reward. If they do a fabulous job they still get the same money – same as if they do a piss-poor job. But if they now realise they can make more money they will suddenly put different calibre talent… it will attract different kinds of people, so this will hopefully act as a trigger for a bigger change.

What was the audience’s reaction like when you broached this subject?
I think they were probably a bit surprised and shocked, but I didn’t stay long enough to listen to all the feedback. As I said, I know that it is uncomfortable – but is it required? Absolutely. So accept it and let’s move on.

Is this something you will be pushing the whole industry to follow or is Coca-Cola happy to do it by itself?
It might be easier if it becomes an industry-wide initiative, but then I also recognise that anything that has to be industry-wide can also become quite time-consuming as everyone brings their own point of view. It could take forever. While I would be very happy to play an industry-wide role on this, the train has already left the station for us. We will be going ahead and doing this.

  • Research consultant Kathryn Korostoff recently looked at the issue of pay-for-performance and how it might apply to research agencies. You can find her thoughts on the subject here.

10 Comments

10 years ago

So I assume that next time I buy a Coke and it doesn't "refresh" me like it used to, then Coke will refund part of the purchase price due to product under-performance, given that they don't take profit as guaranteed.

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10 years ago

Interesting (not so new) idea. The main problem is however that too often the piss poor agency work delivered is because of the equally piss poor client side staff at times. I assume Coca Cola are not going to remunerate their staff solely on the basis of company or project success but if they are, then I'm volunteering for a project! Seriously though, why not base agency pay on a sliding scale based on pre-defined goals and targets? One other thing Stan (can I call you Stan?) you should realise. This approach will mean you will only end up working with the largest agencies who can afford to take a gamble and lose money and I'm not sure that is good for you, the big agencies or the small agencies.

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10 years ago

The sanction for TCCC if you don't feel refreshed from your last Coke is you don't buy another one. As investigation & insights partners of a company like Coca-Cola, the last thing we want is for that sanction to be applied to us! My read on the point Stan is making here (I was at the presentation) is that if projects are priced by cost+share of overheads+profit, there is no place left for the notion that we're really in the business of providing value in exchange for money. The more value we create, the more we should expect to be paid. If you can't deliver the right level of value at a level of costs that makes it worthwhile for you, something needs to change... And that was the theme of the presentation - change isn't an option!

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10 years ago

Consumers penalize/reward brands that don't deliver by buying less/more. That drives profitability of brands up or down!! Poor client side staff comment.... I agree with your comment. It takes two to tango. I also strongly believe in Garbage In-Garbage Out principle. Pay for performance system needs to incorporate a holistic 360 Deg evaluation.

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10 years ago

The Value-Based Compensation plan Stan shared is directly aligned with research agencies' desires to be more of a partner and to move from a project-based, transaction situation to a relationship-based, continuous framework. If we are confident in our capabilities, open in our communications and can build a trusting relationship with our clients, there is no reason not to embrace this approach. We have the opportunity to move to a new level and should jump at this opportunity

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10 years ago

My sentiments exactly Ken, I think that this is a progressive step that will empower clients and agencies alike. As Stan says the trick is going to be on implementing a performance based framework that is genuine to the entire strategy process. I would be interested to hear how Coca Cola and their agencies feel that this has worked 6 months after implementing.

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10 years ago

I've come a bit late to this thread, but it is an interesting one. As a smaller agency we play in an arena of no long term contracts and rely on ad-hoc projects. Smaller agencies are exactly the can of Coke of the example - we are well aware that if we don't perform we dont get bought again. Therefore we make damn sure that we refresh every time. Repeat business is a ruthless measure of our performance, and so we know we ned to out-perform. Again and again, on every project. Thus we are aware that we need to put the 'higher caliber of talent' that you mention on projects - so we do. What frustrates us is where people compare the cost of their commoditised incumbent with that of our out-performing premium offer. Contrary to previous comment, i think this is good for smaller agencies. We are confident that we over-perform and would like to get paid for it. In fact, if any clients who haven't worked with us are reading this, i will put my money where my mouth is, and offer a performace based cost on your first project to get the ball rolling

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10 years ago

If an agency does not deliver, go to competition; that takes care of profit vs performance, not questioning how much they charge; which in any case is a minuscule proportion of the Client's marketing budget. If this is applied, apply it completely - including the MR Managers within Client companies who should be more responsible to what gets delivered to marketing

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10 years ago

I see this as a win-win proposition, as long as the agencies will at least break-even so that they're not thrown into a loss situation. Many agencies already find it difficult to make money servicing clients today... so first there needs to be a true understanding of real costs, and what truly benchmarks "break even." However, the potential to earn "real" money will attract better talent back into the business, and the viability of the agency business will improve leaps and bounds above where it is today. The agency world will be highly skeptical in the beginning. Especially those who have already been beat down by their clients to the point where healthy profits (or any profits) are all but a thing of the past. So before this occurs, there needs to be solid some client-side processes put into place that allow for better collaboration; better final implementation of plans that agencies propose; and a fair measurement system to understand each agencies contribution to performance. Clients must then also stop diluting agency work to the point where it's no longer effective, or in other words... take the give agencies greater ability to do what they do best. Finally, clients must measure (and admit) their own faults too... something which has been very difficult in the past. Great marketing is only one spoke in the wheel, and can only take a company so far. So then in the event that the agency strategy and campaign execution is flawless, but the product fails... the agency will still receive bonus compensation? Right? OR... is it only when the client succeeds AND the agency succeeds simultaneously? Complicated situation. Especially for riskier companies/brands than Coca Cola. I believe a new industry will arise.... Client Risk Assessment.

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10 years ago

I believe it is a perfect example of a very short-term view from a very high mountain, with no one around to say that it is shortsighted. Sorry. Introduction of this system will lead to (a) depressed margins of research agencies (b) recommendations will be focused on getting short-term gains for the client - just like today marketing managers tend to care more about bonus-linked quarterly or annual results, so kiss goodbye to long-term strategies (c) qualified personnel would be leaving those agencies who embark on this scheme, and following this (d) the quality of research will plummet and CC will start the lengthy and unproductive process of searching for whomever is left all over again. I won't even mention the rising transaction costs and the frustration of researchers who are disconnected from the actual decision making. If only the best minds worked in marketing, let me tell you, and the problems of brands could be attributed to just poor insights and researchers who give some vague advice. Aha-ha. What is suggested is wrong for clients, and wrong for the research industry.

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