An Ad Agency Veteran’s “Inside Baseball” Views on Agency Fees

ad agency fees

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Reinvention after a cathartic event?

First off, don’t count on it. There are two factors at play, both of them hinging on money.

Advertisers, for one, don’t really want the entire AVB thing to die. It is way too useful for advertisers:

  • In the best possible scenario, major advertisers can obtain huge cost concessions from their also major media agencies and are then able to deliver very low marketing costs to their procurement officers. With the AVB’s in place, a large advertiser’s CMO might be able to tell his chief procurement officer “hey, I got our media costs down to only 3.1% of gross”. Without the AVB’s in place, the same CMO might have to tell his procurement officer that media is now going to cost 16%.
  • In the worst possible scenario, a CMO will use the existence of AVB’s to negotiate a sweet deal with a media agency… whether or not the media agency actually gets them.

Media agencies, also, don’t particularly want the structure to die. Of the $42 bn in 2013 measured media, only $11.3 bn were in the US (where AVB’s are less easy to come by) and $31bn are outside the U.S. At a conservative 8% of gross, that’s $250mm left on the table. And no one in his right mind would want to leave $250 million on the table.

However, many professionals from all sides of the equation: advertiser, agency and media, do agree that the model is broken.

Certainly, recent developments like trading desks and advertiser-driven programmatic buying point out to the need for an industry reassessment.

What would a reinvention look like?

1. An adult advertiser-agency relationship – Your gardener is not going to trim your hedges and then not charge for it “since he was already cutting the grass anyway”. Agencies need to start behaving the same way: strict adherence to contractual terms. Gotlieb’s assessment of the relationship is true: the term “agency” no longer fits. Ad Agencies need to be recognized as what they are: real companies in search of a profit.

Will this mean the end to trying to get the best results for their clients? Of course not. Ad Agencies will continue to have your best interests at heart much In the same way that your lawyer, your CPA and your tax accountant have your best interests at heart.

Did someone mention results?

2. Ad Agencies need to prove their worth. The only reason ad agencies get hammered when it comes to negotiations is that they can’t really prove their worth. No agency can look at a client straight in the eye and say “my work caused those sales”. So there are two factors at work:

2.1 – Agencies need to insist that clients give them accurate and well-thought-out briefs. If a client hires a media agency and outline, as its main goal, to bring down the CPM on TV to $21.00 from $23.00, then that is the brief. We should assume that the client understands why it wants to do that. If the client hires an agency to increase SOM from 10.1% to 12.2%, then that’s the brief. The agency should be given free rein to create a plan that will achieve it, within an established ROI framework.

2.2 – Agencies also need to prove that their work works. I understand that my CPA will not win 100% against the IRS. However, I would expect my CPA to understand enough of the process to be able to sit down with me prior to the actual trial, explain the rulings that went into the course of action that they had proposed and the strategy that went into the defense. If I were a client, I would certainly expect to sit down with my agency, go through the different aspects that form the marketing strategy, understand the facts that led the agency to their recommendation and then have an appropriate follow up.

Yet, it often doesn’t happen that way at all and, as recently as 5 days ago, I’ve been in meetings where a creative will propose courses of action that are either blatantly wrong (selling a TV station I’m helping launch to the creative directors of an agency because “they may influence the media guys”) or have no data behind it (we need to create a social campaign in Pinterest to increase the awareness of the station when the programming is aimed squarely at young men).

Agencies are basically alone among large companies in spending zero dollars in their own R&D. Imagine a Colgate, L’Oreal or Unilever not spending money in R&D and launching a product on a hunch. Right.

One of my proposals to the industry hinged on the large groups commissioning a holistic study on how advertising really works. Then, instead of keeping the study private, making it completely public, so that other researchers can add to it, other agencies use it and, in general, make it so pervasive that it becomes the currency in the ad industry. That way, one minimizes the challenges from the media and advertisers.

3. Need to regroup into coherent units.

Much like their clients, ad agencies need to start regrouping into single coherent units. At some point, General Motors had a finance company as a profit center and Sears bought an insurance company as a profit center to put inside its stores. No longer. GMAC was spun off. Allstate is independent.

If there are dozens of factors affecting the sales and share of their clients’ products, then ad agencies need to make sure that they control as many as possible of these factors. The end result should be an end to the endless division and subdivision of agencies and a regrouping into single units.

Clients have long opposed that for a variety of reasons. The real reason, of course, is the “divide and conquer” approach that has lowered agency fees. The strongest ostensible reason is that this might “lead to a conflict of interest”. Yet, the same clients see no harm in their lawyer, CPA or doctor having “competing” clients in their rosters. So, ad agencies need to behave more like real companies. General Motors sees no problem building several models with the same chassis, after all.

If clients do not trust their agencies to have their best interests at heart, then go look for another agency. But there are not that many large agencies and, honestly, for ad agencies to continue this balkanization seems illogical.

Next- Big advantages for agencies along the way

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