Part one in a series on vendor economics.
When you purchase clicks, leads, calls, lead warming, or salesperson services, what’s the best pricing model to work from? It’s a deceptively simple question, and how you answer it can strongly influence the success of your partnerships—and your whole leads and sales programs overall.
To help marketers better understand the right pricing model for their business aims, we’re launching a blog series on the primary lead services models, and the upsides and downsides of each. We’ll focus our examples on lead warming services because that is the space we know best. However, note that the economics and business principles apply equally well to other segments of the sales funnel listed above too.
In our first piece, we’ll focus on what’s probably the most-misunderstood model amongst readers: Pay Per Success, also known as Pay Per Performance.
In a Pay Per Success arrangement, the brand is only charged for leads that the warming agency was able to successfully convert into a prospect who’s ready and primed to speak to a brand sales representative. For instance, if a brand sends over 1,000 leads and the lead warming agency is able to convince 30 of those prospects to move to the next stage of the conversation, the marketer only pays for those 30 connections.
Depending on the payment structure, the per-success arrangement could work as a flat fee, a percentage of revenue on the sale, or both. Brands will also often include a quality assurance qualifier as well. For instance, if the vendor provides telephone connections, the brand might stipulate that it will only pay out if the prospect spoke with an agent for a minimum of 60 seconds. In theory, these conditions are intended to give the vendor both an incentive to work through as many leads as possible, as well as a reason to give each individual lead the proper attention.
With these contours in mind, I’ll describe the upsides and the downsides of the model below.
It’s easy to see why Pay Per Success is so widely sought after. It’s nearly risk-free, at least at face value. No matter how many leads the marketer sends along, the marketer only pays for the successful conversations delivered. In the example above, had the numbers been 30 successful conversations out of 2,000 leads, or 10,000 leads, or 1,000 leads, the cost would be the same.
In addition to being a value in its own right, the prospect of risk-free pricing also makes the program easy to get buy-in and sign- off by even the most budget-conscious or risk- averse approvers. Simply put, Pay Per Success pricing makes programs easier to implement and, at least initially, less stressful to manage.
The downsides of Pay Per Success tend to be hidden, largely because the negatives are largely driven by what’s happening on the vendor side. One negative stems from the vendor goals this payment structure incentivizes. The second negative stems from the risks that the vendor is taking on.
In terms of incentives: Since you’re only paying out when the vendor delivers an interested lead, it’s in the vendor’s best interest to get as many prospects as possible to say “Yes” to a conversation. Sometimes this can incentivize outright aggressive sales tactics – although given that most lead warming firms want to manage their reputations and their relationships with brands, these cases are less common than you might think. What is fairly common, however, is more subtle but still highly wasteful: Lead warmers who are less diligent about weeding out bad leads, and who are more focused on the fast (even if begrudging) “Yes” than on setting the stage for a productive conversation with the brand’s teams. Pay Per Success incentivizes quantity, not quality.
When the marketer’s team receives those less-than-stellar leads, it’s now their job to to clean up the the improper lead warming. Instead of spending their time on the focused sales they’re paid higher salaries to handle, they’re forced to waste time doing the qualifying and warming work that the lead warmer’s haven’t done effectively.
By incentivizing quantity over quality, the pay for success model effectively forces the higher-paid salespeople to waste time on work that should have been done by the low-cost vendors. Over the tens of thousands of leads that lead warming firms are meant to handle, this amounts to an enormous hidden cost.
On top of the payment incentives, there’s also the matter of risk. Brands appreciate the favorable terms of pay-per-success because, from their perspective, there appears to be zero potential downside. Of course, there’s tremendous potential downside for the vendor. If the brand sends over a significant number of poor-quality or otherwise difficult leads, the vendor ends up working to achieve success without seeing results. That lack of results means the vendor doesn’t get paid—and there’s no incentive for the vendor to continue the relationship.
To mitigate that risk to the vendor, the vendor must use two tools to protect themselves – neither of which is favorable to the brand. The first is simply increasing the charge per transferred lead enough to make the “wasted” work of failed leads still worth the vendor’s while. Of course, there will be cases where the leads prove particularly hard to close – so much so that even the normal additional “padding” won’t justify the work. At that point, the vendor may have no choice but to protect its interests and pull out of the tough campaign, leaving the brand without a warmer for these leads. Even if the result is just a temporary disruption in lead handling, the brand is still facing a “silence” in the prospect conversation during which leads get progressively colder.
Brands rely on their lead warming vendors to fill two roles. One is to ensure that their highly-paid sales teams focus efforts only on the most promising potential customers. The second is to serve as a reliable “bridge” from the lead source to sales conversation, ensuring that the best potential prospects are channeled quickly to sales representatives waiting to move them along the funnel. The problem with pay per performance is that it does a poor job of incentivizing vendors to work effectively on either front.
Pay per performance is a pricing model with some obvious benefits, alongside serious drawbacks. How do you know if pay per performance is right for your business?
One key question to base your answer on is how easy your lead is to close – and how comfortable your organization is with the hidden costs I’ve outlined above. If you’re dealing with both a very tough vendor approval environment alongside very “closable” leads – for instance, brand-exclusive leads that come from recent site visitor opt-ins – then Pay Per Success could be an attractive option. In this case, the vendor has great incentives and few hurdles to achieving success: most of the leads are inherently valid, and the customer has raised their hand, making much of the lead vetting and warming a clear-cut endeavor. Meanwhile, the “behind the scenes” hidden costs may, perhaps ironically, raise fewer objections from Finance than explicit fees would.
For tougher cases – say, you’re paying a firm to warm thousands of 180-day old follow-ups – then the Pay Per Success model may not make sense, as it’s not in the warmer’s best interest to work very hard with limited prospects of converting. Similarly, in environments that foster more nuanced Finance and Procurement discussions that include looking deeper into hidden costs of vendors, then Pay Per Success may not be right for your organization either.
In those instances where Pay Per Success isn’t a fit, the best pricing approach for you is more likely to be another reigning model: Pay Per Lead, which we’ll dive into in detail in our next post.
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