P&G Killing the Billable Hour for Ad Campaign
Kill the billable hour! Oh wait, this isn't accounting, WTF? Smart move for P&G.
For Grey Global Group Inc., its contract to create TV, print and Internet advertisements for Procter & Gamble Co.’s Pringles isn’t just about selling potato chips. It’s about the end of billable hours.
Instead of being paid for hours clocked devising promotions for rice potato chips or crispy cracker sticks, Grey earns an undisclosed fee upfront and add-on payments for sales and market share gains. P&G moved brands accounting for 40 percent of sales to the new payment system July 1 and aims to expand that.
P&G and Coca-Cola Co. are leading the switch to pay ad companies for the value they bring to a brand, making them more accountable. Analysts say the practice will cut fees at a time when the recession erodes sales in the $456 billion advertising industry, known for lavish parties such as the annual Cannes Lions International Advertising Festival on the French Riviera.
“This is harmful for the ad agencies and they are very much against it,” said Alexander Wisch, an analyst at Standard & Poor’s Equity Research in London.
The practice may shave half a percentage point off revenue in the short-term, Wisch said. The world’s top five advertising companies had 2008 revenue of $44 billion, according to industry publication Ad Age. That means about $220 million in lost revenue annually for those five alone.
The economic crisis emboldened advertisers to demand results before paying agencies, which can lead to lower ad sales and more competition, Wisch said.
Come on kids, keep up. The billable hour has always been a bad idea, and it's always been much more effective to dangle a performance carrot than one that encourages revenues based on milking as much client loot from the teat as possible.