Commission or CPA? Which is better for the advertiser?

A performance agency is usually catering to a few decision-makers on the advertiser’s team:

• Partnership/Growth manager 
• Head of UA/ Creative/ Product 
• CEO/ Co-Founder/ Stakeholder

Hence, the aspects an agency tends to highlight in the proposal are:

1. Service
2. Expertise
3. Money in exchange for money (profitability)

Every reputable performance agency is active in terms of PR. They are active on social media, attend conferences, and have a portfolio of cases. That brings service and expertise to light. However, when it comes to money (the payout terms), there is less clarity.

There are 3 common payout models available:

• Budget + commission on total ad spend (agency fee)
• CPA
• Profit Share

To compare:

1. The budget + commission model is often overlooked, but there are ultimate advantages:   

• The agency is provided with a secured budget to deliver the desired results.
• Advertisers have a greater incentive to collaborate due to the small commission they pay on total ad spend, which encourages the provision of critical assets, branding information, and benchmarks that are essential for campaign success.
• This model allows bid experimentation that may uncover a new, higher-paying audience not identified with CPA's bid strategy limitations.

2. CPA is commonly used, but it has limitations:

• The CPA model cuts the pool of hypotheses for testing, which may result in less than 100% productivity.
• Fixed CPA may set unrealistic expectations, as it varies across different regions and channels.
• Since the service is provided for free, some advertisers may lack the motivation to actively engage with the agency, leading to delays in providing necessary assets. This lack of engagement can negatively impact performance.

3. The Profit Share option opens up after testing, so I won’t be reviewing it in-depth.

Commission-based payout model appears to be the optimal choice for the start of the partnership: the advertiser retains control, while the agency receives enough support to ultimately increase ROAS.

Choosing the right payout model is essential for a successful advertising campaign. By collaborating with the performance marketing agency, advertisers can leverage their expertise and service to achieve the desired results. 

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