The Put-up-or-shut-up Strategy
Jim Quest was unhappy -- even worse, he was losing money.
His ad agency, Posey Quest Genova Inc., had beat out five other firms for the right to represent Murphy's Oil Soap, but what once looked like a wonderful opportunity was turning out to be Quest's personal Little Bighorn.
Oh, there was no problem with the ads. Quest, 54, had scrapped Murphy's old campaign -- which sang the cleanser's praises to the tune of Turkey in the Straw -- in favor of soft-soap testimonials. And the new pitch, which featured the caretakers of churches and opera houses talking about how wonderful Murphy's was, had earned a fistful of awards.
More important, the ads differentiated Murphy's from its much larger competition. While Top Job and its ilk were tough on dirt, Murphy's became the one to use whey you needed finesse, not muscle. Quest, a Procter & Gamble brand manager for about five years, was particularly pleaded with this positioning. It not only gave him a chance to get back at his former employer -- P&G's Mr. Clean is the market leader -- but it also, he thought humbly, showed the kind of savvy thinking his agency could offer Murphy.
Indeed, Quest was constantly on the phone to Murphy's Oil Soap headquarters outside of Cleveland suggesting marketing moves, promotions, and possible new products. In fact, he called so often that he programmed the phone in his office in Greenwich, Conn., so that he could call Murphy's by touching just one button.
But all of this time was costing Quest money. He was getting paid just to do Murphy's advertising. While his ideas might be producing profits for his small (almost $30 million in billings) agency. The result was that what had started out to be a terrific account was quickly turning into a loser. Quest wanted to renegotiate.
Paul Murphy was sympathetic -- to a point. You want your suppliers to do well, he says, but he hadn't asked Quest to do anything except his advertising. Murphy, great-grandson of the company founder, heads The Murphy-Phoenix Co.'s marketing division, and he thought it was doing just fine, thank you. And while he valued Quest's ideas, he had made clear from the start exactly what he was buying from Posey Quest Genova. Advertising. Period.
If Quest was losing money on the Murphy's account because, as he concedes, he negotiated badly in the discussions that set the level of service the agency would provide, well, what could Murphy do?
Quest had an answer. One that not only made both men happy but could, if applied intelligently, affect the way your company deals with service suppliers from now on.
Call it the put-up-or-shut-up strategy.
Quest's idea calls for his agency to share in Murphy's success if his marketing concepts end up generating more sales. If they don't, he'll end up working for less than he's now getting.
The strategy is the perfect way to get your supplier to put his money where his mouth is. If Quest is as good as he says he is, then he stands to make a lot of money. If he's not, he won't. It's that simple.
Here's how it works. Let's say Posey Quest Genova charges $75 an hour for its time. Under the arrangement with Murphy's, it might get $65, but will receive a bonus, based on an increase in Murphy's sales. If sales increase 20%, so does Posey Quest's fee. Instead of $65 an hour, it will make $78. If sales stay flat, or decrease, the fee stays at $65.
From Quest's point of view, the new fee structure, which went into effect last year, makes perfect sense. "Small agencies such as ours are historically tied to the success of their clients. The client had better make it, otherwise, the agency won't." This arrangement codifies that basic understanding. It also gives the agency an overwhelming incentive to do well. Says Quest: "This is as close to gaining equity in a client as I am ever going to get."
From Murphy's perspective, it is a no-risk move. His company is a marketing-driven operation. Good advertising boosts sales. If Quest can turn out commercials that make the cash register ring more often, Murphy has no problem with sharing that success. If the agency doesn't do its job, then it gets paid less. "But the biggest advantage is that it gets the agency thinking the way you think -- strategically," says Murphy.
"Before we put this arrangement into effect, we'd come up with a promotion we wanted to do, tell the agency about it, and they'd figure out a campaign. That would be the end of their involvement," he says. But under the new structure, Posey Quest has a vested interest in doing more. That's exactly how it has worked.
Consider the idea, for instance, of putting the 75-year-old cleanser in a spray pump. Company executives had been toying with the thought, but there was no particular push behind it. It was just one in a long list of ideas that companies consider when they look for ways of boosting sales.
Quest heard about the idea, and thought it was a sure thing. "The only thing that separates just another idea from what becomes a new product is enthusiasm, and I was enthusiastic about the spray pump." Quest tested the idea with consumers and hired a market research firm to do projections of how well it would do. Armed with the results of the research, which was paid for by Murphy's, Quest lobbied long and hard to get Murphy's to test the idea. It did. The product went national this spring and racked up substantial sales.
Both Murphy and Quest are notably closemouthed about numbers, but Posey Quest received a more than20% increase in its fees last year. Profits from the spray-pump product will kick in this year.
And that, says Murphy, is exactly the way it should be. "The problem with traditional ad-agency compensation is that it's hard to put a number on a good idea," he says. "With this system, you can. Agencies often feel they're underpaid. Now, Posey Quest feels it's getting what it is worth, and I don't think I'm overpaying."
Are there potential problems with this arrangement? Sure.
For example, since Posey Quest's fee increases as sales do, the agency could be tempted to overadvertise, overpromote, and generally overspend in an attempt to boost Murphy's revenues.
While that spending might pump Murphy's sales (and Posey Quest's bill), it could destroy earnings.
"They're smarter than that," says Murphy. Says Quest, in a separate conversation: "We want this to be a long-term relationship. We won't jeopardize it by trying to get everything we can today."
But couldn't it be jeopardized by jealousy? What happens if Murphy's comes up with a nifty idea, totally independent of Posey Quest, that triples sales? Its advertising bill is going to triple, even though the agency didn't do anything different.
"That's true, but the opposite could also happen," Murphy replies. "They could see a 20% drop in fees, if P&G comes out with an oil-based soap, and that, too, would be a result of things beyond their control. In any partnership, you may not always get what you deserve, but that happens."
And creating that partnership is what makes this concept so appealing. The interests of supplier and buyer are now more closely aligned. They're not exactly identical, but they're close. Instead of working for the folks at Murphy's, Posey Quest is working with them.
And as you know, partners work harder than employees.
I WIN, YOU WIN
How to get your supplier thinking about ways to make you money
The theory behind the way Murphy's Oil Soap pays its ad agency is simple: If I win, you win. If Murphy's sales increase, so does its ad agency's fee.
The mechanics of the arrangements are simple, and the approach could be used by any company that does business with a supplier of services.
Just keep in mind you are going to give the supplier less money than it would normally receive as a base fee, while holding out the possibility of a substantial bonus based on an increase in your sales (an increase presumably caused by your supplier's services).
Here's how Posey Quest Genova and The Murphy-Phoenix Co. did it.
* Determine a starting point. If you are going to give out bonuses based on greater sales or earnings, you need a starting point.
Let's say you are paying your supplier $10,000 a year, and you are happy with the work. When you put the plan into effect, you might agree to pay only $8,000, but guarantee to increase the fee 1% for each 1% gain in your sales.
That's how it worked with Murphy. Since the agency was losing money on the account, both sides agreed to use the existing fee as the starting point. It was already less than the agency traditionally charged.
* Figure out when to change the fee. While it's possible to adjust the compensation system based on monthly sales, there would be fewer administrative hassles if you waited a bit.
* What is the fee based on? You can change your supplier's fee based on increases either in sales or in earnings. Profits make more sense for publicly held companies, in which there is extreme pressure to report good earnings per share. With privately held companies, an argument can be made either way. While earnings are certainly important to the owners of private businesses, how they're reported can be fuzzy.
What you base the amount on is less important than finding a common ground. You are trying to create a partnership with your supplier, so the last thing you want to do is start off distrusting each other.