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There's been a lot of agency talk about expanding pay-for-performance agreements, but Peet's Coffee & Tea and its new digital shop Razorfish are putting their money where their mouths are with a compensation plan 100% reliant on Peet's bottom line in e-commerce.
The coffee retailer, which is backed by private equity, has named Razorfish, the Publicis Groupe digital giant, to handle its growing but small e-commerce business after an informal search for an e-commerce agency of record.
Under the terms of the assignment, Razorfish will provide services in exchange for a share of Peet's e-commerce profits. That's a departure from the typical arrangement, in which agencies charge fees based on the full-time employees on the account, and more traditional performance-based compensation schemes, in which agencies sometimes get bonuses tied to marketing-specific results or even sales.
"We were looking for something that got a company really tied to the results of the business so they had equal skin in the game," said Jon Weinberg, VP of strategy and e-commerce at Peet's. If Razorfish stopped at "the revenue line," it would be less invested in Peet's spend and marketing program "than if they could look down to the profit line and help us retool our programs in a much deeper way."
"The hope is that it's a long-term collaborative relationship that both of us profit from," he added. "We're going in with that assumption."
Razorfish will support e-commerce strategy, digital media buying and planning and search, but won't be responsible for Peet's actual marketing costs, like the expense of digital ads. Still, the shop has incentives to spend wisely because additional costs affect Peet's earnings -- and, therefore, Razorfish's pay.
The agency and Peet's will evaluate the arrangement after six months.
The model could be ideal for marketers, but it is riskier for agencies because it pegs pay to sales results that are affected by factors beyond those agencies' efforts.
"Before we even met with them we had done an audit of all e-commerce properties and marketing efforts, and we felt confident we could help take them to the next level," Razorfish CEO Pete Stein said. "We built out a business model where we defined exactly what our expenses would be and, based on our analysis of where the program was today and what they were willing to commit in terms of media spend, where we thought we could find an upside. There's definitely some upfront investment for us, but we're super confident."
$142.5B 2015 U.S. ad spending for 200 LNA
Along with increasing its digital media spend, Peet's plans on expanding its retail footprint, which added to the shop's confidence. "We know that lifts e-commerce sales," Mr. Stein said.
Another early indication that it was a good match was that both Mr. Weinberg and Peet's CEO Dave Burwick attended an introductory meeting with the agency, he added. "We started the conversation at a good level."
Razorfish expects to break even after six months of investing time and talent, and to double Peet's e-commerce business "as quickly as possible," said Mr. Stein.
After only a few weeks, the team is already starting to see results like doubled click-through rates using basic tactics such as paid search and rewriting keywords, added Razorfish VP and Client Partner Jason Rzutkiewicz. The next step is to analyze new and existing consumer behavior. "We had to get in flight immediately since we know we need to see a return right away."
Mr. Stein said he hopes to replicate the profit-sharing model with other clients in the future.
Peet's was founded in 1966 in Berkeley, Calif., by Alfred Peet, and acquired by Joh. A. Benckiser for $1 billion in July 2012.