Charging More for Good Ideas than Bad Ones

LinkedIn Article by Tim Williams 
December 11, 2012

In the marketing world, because the creative services business is still mired in the hourly billing model, it’s an unfortunate fact that bad ideas cost the same as good ideas. Advertising agencies count up their time and charge their clients the same for a game-changing campaign as for a poorly-crafted series of messages destined to be ignored.

It’s time to change that.

Looking to Hollywood, some of the biggest stars take the biggest risks when it comes to compensation by taking a percentage of the box-office earnings. A good film makes more than a bad film, and the leading actors get paid accordingly.

In the world of professional photography, a good photograph earns more than a bad photograph. Because the photographer owns the rights, the more the photo gets used, the more the photographer earns. The iconic Maxell photoshowing a man in a chair “blown away” by the sound of Maxell audiotape is still earning royalties more than 25 years later.

STUCK IN AN OUTDATED PARADIGM

Despite the fact that most of the professionals that advertising agencies draw upon to complete their work -- photographers, actors, musicians, voice talent, illustrators, etc. -- earn more for good work than bad work, most advertising agencies themselves are stuck in a pricing paradigm that doesn’t correlate at all to value.

It’s time for marketing communications firms to realize that they’re in the intellectual property business instead of the hourly rate business. An advertising campaign is a piece of intellectual property, just like a photograph, an illustration, or a software program. And most IP is sold based on usage. Adobe sells licenses to advertising agencies to use its Creative Suite of software. Agencies don’t pay Adobe by the hour, or based on the number of hours Adobe invested in creating the software. Ad agencies typically pay companies like Adobe and Microsoft a lot of money, because ad agencies use these types of software products a lot.

But then these same ad agencies charge their clients not based on the value of their work (how much it gets used) but rather based on the time it took to create it. It’s time for all parties in the marketing world to stop and realize that the value of an idea cannot be measured by a clock. This is the wrong measurement; like sticking a yardstick in an oven to determine the temperature. The value of an advertising idea can only be measured by the outcomes it creates in the marketplace.

MOVING TO AN IP MODEL

The best way for ad agencies to wrap their heads around the concept of intellectual property is to first separate the concepts of ideationexecution and usage. These are three different things. Currently agencies derive most of their revenues from execution, followed by ideation (although most agencies undervalue and undercharge for this). Most firms don’t even consider usage as a potential revenue source, even though this is how agencies pay most of the outside creative resources they themselves hire.

For example, the Advertising Photographers of America (APA) espouses a set of principles that establishes the day rate as just a minimal part of a photographer’s income (really just to cover basic expenses) and instead has its members charge for the usage of the image, in which the buyer pays:

  • More if you use an image more than once
  • More if you use it in more than one way
  • More if you use it over a longer period of time

Ad agencies can price their work and services in a similar way by thinking in terms like these:

IDEATION (Developing the idea)

  • Agency charges a modest concept fee, or no concept fee

EXECUTION (Executing the idea) 

  • Agency charges outside production costs only, or agency pays all costs

USAGE (Using the idea) 

  • Agency charges a per use fee

In this way, good ideas earn more than bad ideas because good ideas (ones that produce effective outcomes) will keep getting used by the marketer. And good ad agencies will earn more than bad ones.

As long as agencies stay on the hours-based “work-for-hire” treadmill, their earnings and profitability will stay on the downward course that started almost 40 years ago. Paying for usage instead of time is a better way for talented marketing problem solvers to be compensated for value created, and a better way for marketers to pay for value received.

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