Shared Risk / Shared Reward - Function Growth’s Unique Approach to Compensation
Kyle Hoffman, Director of Growth Strategy | August 11 2023
From the early days of advertising, the traditional cost-based compensation model for agencies has been the industry standard. You may be familiar with this model. Agencies are paid a fixed retainer amount on a pre-determined timeline, usually monthly, regardless of the value they create.
This traditional cost-based compensation model can leave each side—both agency and client—feeling disconnected and misaligned. The model is flawed for a very important reason: It misaligns the economic incentives on each side. Instead of figuring out how to drive value to benefit all parties involved, the traditional model focuses entirely on the wrong things: efforts, activities, and costs.
Fortunately, a new compensation mode has been created that proves to be mutually beneficial and holds significant value for both agencies and clients.
This new model, called value-based compensation, emphasizes the importance of aligning economic incentives and focusing on the creation of value. The value-based compensation model offers a more holistic and effective approach to agency-client relationships by shifting the focus from costs and activities to outcomes and results.
It’s pretty simple: You win together, you lose together. Sharing the risks and rewards in a true partnership makes sense.
This is how we choose to operate at Function Growth. We work beyond pay-for-performance models and work with brands from the inside out, taking on leadership roles and building teams within the company to drive unprecedented growth. By putting our skin in the game, we create a true partnership with our clients that not only drives values but helps everyone bring their best work to the table.
The Power of a Shared Risk, Shared Reward Model
The shared risk and reward model is a powerful approach to building successful partnerships. Unlike traditional compensation models, which often leave agencies and clients disconnected and misaligned, a value-based compensation model offer a more collaborative and mutually beneficial framework.
Foster Rapid Growth
Equity discussions can be complex, time-consuming, and create uncertainties for both parties, which can be a high hurdle to discuss when first starting a relationship. Unlike equity, revenue sharing can be one of the best ways to align successes and get off the ground quickly in a new partnership.
The shared risk and reward model aligns both parties quickly to foster rapid growth. By tying agency compensation directly to the revenue generated by the client’s business, a strong alignment and understanding of goals and interests are established. As part of a true partnership where agencies are fully invested in the client’s success, agencies are motivated to work diligently to drive value.
Motivation to Go Above and Beyond
Most marketing agencies charge for their time and activity, not for how successful they are. While a few have adopted a performance marketing structure, where clients share revenue as a performance motivator, a shared risk and reward model proves to be truly transformative for both sides because not only do the two sides share reward, but they also share risk.
The more value agencies create, the more they stand to gain themselves. And, with skin in the game, agencies are truly accountable for the value they add and are more motivated to not lose. It’s a win-win situation for everyone.
A value-based compensation model incentivizes agencies to go above and beyond to drive tangible results. It creates a culture of innovation, strategic thinking, and continuous improvement as agencies are driven to maximize revenue and drive value.
A value-based compensation model encourages collaboration and long-term commitment. Both parties have an understanding of shared objectives and goals, so agencies and clients become true partners.
Sometimes, traditional cost-based models can create an “us versus them” mentality instead of focusing on the goals at hand. With a shared risk and reward model, clients no longer need to be concerned with the agency’s costs. And, creativity and innovation are no longer impeded by predetermined financial limits to the project. The agency can focus on driving value rather than the team’s hourly productivity.
A New Approach to Unlocking Exponential Growth
When trying to chart a path forward towards unprecedented growth, today’s direct-to-consumer businesses face a complex scenario of inputs and outputs.
Think about it: there are more levers available to founders and marketers than ever before. Articles and agencies suggest there is a magic silver bullet to “unlock” exponential growth. How many times have you fired up LinkedIn and seen a version of the headline, “do this one thing to achieve success”...?
The truth is, there is no golden ticket. Success requires a harmonized and orchestrated effort that spans across your entire business. It takes a team of multi-disciplinary growth experts to devote massive amounts of attention and focus on the areas that matter most.
If you’re left feeling frustrated with partners and agencies that just don’t seem to care, and have little to lose, it may be time to do something different.
If you do what you’ve always done, you’ll get what you’ve always gotten.
Winning Together: Function Growth’s Snap-In Growth Approach
There are a lot of agencies these days who show off exciting case studies and claim they have the secret sauce to grow brands, but few are willing to put their money where their mouth is.
Function Growth is a unique partner that gets on the front lines with your company through a shared risk and reward model.
Unlike traditional marketing agencies, we’ve chosen to do things differently. We have found that the best approach is to snap-in to our partner's business, operating as an extension of the company. That’s why you will find our multi-disciplinary team of growth experts sitting on our partner’s leadership team or board for over 95% of our clients.
We’re so confident in our approach that the only way we operate is through a shared risk and reward system.
Partnering and Selecting High-Potential Brands
Our target strategy requires a thoughtful approach to who we work with because of our shared risk and reward model. Because of our unique approach and willingness to put skin in the game, we select high-potential brands that we believe can help scale healthily.
Every prospective client undergoes financial due diligence and meticulous review to make sure we are selecting client partners that we will work best with.
Here are some of the core qualities we look for:
- Entrepreneurial: One of the key qualities we seek in a potential partner is an entrepreneurial spirit. We collaborate best with brands that have a growth-oriented and innovative mindset, as these qualities align well with our own growth strategies.
- Agile and Solutions-Oriented: In today’s rapidly evolving business landscape, we also seek partners that are nimble, agile, and solutions oriented. We look for brands that can embrace change and adapt quickly.
- Delegate and Share Authority: We recognize that effective growth requires collaborating and trust. We seek brands that are open to sharing responsibilities and decision-making processes.
- Open to a shared risk and reward model: A prime candidate for our partnership understands the value of a shared risk and reward model. As a core aspect of our business, we believe in the power of aligning incentives and sharing both the risks and rewards. This approach allows us to create a true partnership and mutual commitment to ongoing success.
By carefully vetting and selecting our partners, we deliver impactful and sustainable growth strategies for our clients, driving mutual success and value creation, and ensuring the shared risk and reward model is beneficial for all involved.
Partnering with Function Growth to Unlock Exponential Growth
Shared risk and reward models offer numerous benefits for building successful partnerships. By aligning incentives and fostering rapid growth, a value-based compensation model creates a collaborative and mutually beneficial environment. Furthermore, it proves to encourage innovation, accountability, and long-term commitment, ultimately driving the success of all involved.
If you are looking to unlock exponential growth and work with an agency that is a true partner, contact the growth experts at Function Growth. Our unique approach allows us to understand the intricacies of your brand and work collaboratively towards achieving your growth goals. Get in touch with us today to see how we can drive growth from the inside out.