Mike Fromowitz
Aug 20, 2011

What 'value' do advertising agencies bring to clients?

I have a question. What if advertising is in a bubble?  The industry today is dominated by a handful of vast holding companies, and for years now, they have focused on growing their businesses ...

What 'value' do advertising agencies bring to clients?

I have a question. What if advertising is in a bubble?  The industry today is dominated by a handful of vast holding companies, and for years now, they have focused on growing their businesses through acquisition—buying up ad agencies, PR shops, DM and B2B agencies, digital shops, consulting firms, design studios, research and media companies, and more. They’ve been engaged in an arms race of consolidation as they pursue the economies of scale that they view as the only route to competitive advantage, or even survival.

Some of these acquisitions were steeply overvalued. A number of companies that were swooped up in the buying frenzy do not exist anymore. During the buying frenzy, there were several client defections; huge staff cuts, and the agonizing chore of convincing arch rivals such as P&G and Unilever, Mattel and Hasbro, to co-exist under one roof.

These acquisitions however, did allow the agency holding companies to shrink fixed costs while still providing clients every service imaginable, yet they still struggle with profitability. Are these services as good as they use to be?  Are the services now procured as if they were a commodity? Have the holding companies perpetuated a commoditized agency industry bubble? We think so.

Every year, the holding companies set growth objectives for their agencies with the aim of achieving higher profits and a bigger share of the market. And so they should. After all, this is a business like any other. However, given the present economic climate, simple arithmetic suggests that some of them will be disappointed. Despite their huge market share and broad scope, the combined value of these corporations is less than $30 billion. That seems small to me—a mere trifle for marketing services in a trillion dollar global market.

The services that agencies provide to their clients are not commodities of course, but many factors over the last few decades have perpetuated their devaluation. As marketers continue to make even greater demands on their agencies to deliver “more for less”, the holding companies are constantly under price pressure.  Consequently, shrinking margins have led to intense consolidation.  Certainly, the industry is not doomed, but as consolidation has neared its limit—with hardly any big acquisition targets left to pluck—a new model needs to emerge if the industry is to prosper. So we wonder, what’s the next act? Will there be more independent agencies springing up? Will they have something different to offer?

The ad agency of the future

It’s difficult to make bold predictions on the future of advertising agencies, as the definition of what constitutes ‘the agency’ is evolving rapidly.  Ty Montague of Co Collective (www.cocollective.com) and Ben Malbon of BBH Labs (www.bbh-labs.com), sees the future in crowdsourcing—maintaining a creative arsenal of high quality individuals and partners located outside the formal confines of an agency—permeable networked organisations versus simply organisations within networks. Joseph Jaffe (JaffeJuice.com) thinks we will see two kinds of agencies: the idea generators and the executors of those ideas. Agencies like Victor & Spoils and IDEO are testing some of these ideas. I doubt, however, that these are models for future ad agencies.

I think models like those of Anomaly (New York and London) and Coudal Partners (Chicago) are headed in a positive direction in launching their own brands to some degree. I also tend to agree with Bud Cadell (whatconsumesme.com) who believes “The market will inevitably force agencies into evolving into one of three species: the idea maker, the technician, or the platform builder. None of these models guarantee survival indefinitely and all are, as of now, still nascent”.

If we are to believe that there will always be a need for creativity and innovation, why is there so much interest in ad agencies that sell themselves on a positioning of “cheaper and faster”? You certainly don’t have to look too far to find them—scores of new advertising agencies and digital shops. The internet is chock-a-block with their websites. They crank out logos, website designs, banner ads, menus, brochures, catalogues, email newsletters, sales kits—you name it; it’s a basketful of commodity stuff. Their selling proposition comes down to this: “We can do it cheaper and faster”. They fail to create the branding experiences, platforms, and content that help brands build meaningful relationships with consumers.

“Cheaper and faster” doesn’t necessarily mean “better”.  How can that be a sustainable strategic platform? These new agencies may just be working themselves into a hole thinking that every single thing in life has to have a new version, new features, flashy bling, and constant updates. Being “faster and cheaper” will not guarantee your success in the long run. On the other hand, being “better” has enormous value when quality is an issue.  When it isn’t, price becomes the primary differentiator.

It’s getting ugly. More and more, clients are looking for "value" (read: discounts) from their ad agencies. They want “cheap” without reducing service. They are demanding "more for less". Push back and you lose the business. You are forced to lower your fees or they find a lower cost agency.

Price vs Value

As I see it, we have a problem with the word “value” today. Increasingly the concept of value has come to mean "cheap’, "bargain”, "budget”, "economical" or "discounted”. But value doesn't mean any of those things. Value means "worth the money." It means a fair and reasonable price for the product or service rendered. Value is timeless.

If your selling proposition is solely based on price, you are educating your clients to make price a primary consideration when it comes down to the work you do for them.  If you compete on price alone, then your pricing strategy is fairly straightforward. Talk the pricing story and hope your competition doesn’t undercut you. And believe me, there will be many agencies—the bottom feeders—who are ready to undercut you.

On the other hand, if you compete on value, you must work to insure that all the services you provide for your clients are building value. Your strategy is to position your agency so the client sees the value you are offering. If you can successfully build value in the client's mind, much like Apple has done with its customers,  you can charge higher prices for your services, and increase profitability.  As long as they believe they are getting a good deal for their money, you can charge higher prices. It's what your clients believe that counts.

A great example of price vs value

Most PC companies (HP, Dell, Sony, etc.) bundle an excessive amount of useless software with their computers. By doing so, these companies believe that the extra software validates the higher pricing level. But Apple believes and does the opposite.

Over the years, Apple has built a solid reputation of value with its loyal customer base. When you buy a Mac, you don’t get all the “extras” offered by traditional PCs. However, the software that does come on a Mac is highly valued by its end consumers. Right out of the box you can edit pictures and videos, record songs and podcasts, and burn DVDs. They come standard on a Mac, but on PCs you have to pay extra for it.

The problem with pricing strategies is that companies tend to develop overbuilt products that do not necessarily solve a customer’s problem. The same holds true for ad agencies. Their basic skill is the ability to create advertisements, but this skill is now so often submerged in the mass of client services that clients, quite reasonably, expect them to provide these days. Conversely, having a value based pricing structure allows companies to focus on the key features that differentiate their products and services.

Agencies sell results

How agencies make money—or don't, remains an intriguing subject. Like a law firm, we’re selling a service priced around the cost of time. We're selling a creative product, the value of which can't be measured by the time it takes to create. We're selling results, which in many cases can’t be measured by anything but sales. Are we valuing our work on how long it takes to create, or on its inherent worth? How do we determine and justify the value of what amounts to intellectual property? One could go crazy figuring out this stuff.

Many ad agencies arrive at their final pricing based on some mysterious brew—a mix of what the client thinks it's worth, what the agency thinks it's worth, and some justification based on how many people it will take and how long it will take to create it.

Walking the “cheaper and faster” economic route is not the way to go in this day and age. Clients who choose to work with agencies that sell themselves as “cheaper” usually end up moving to agencies that will provide them with the advice, thinking, strategic direction, and solutions that come from more experienced people because they can really add value.

Truth is, the product of advertising agencies is “ideas” and they cannot (and must not) be commoditised. Clients want ideas—and the effective, creative solutions that will help them achieve their branding or sales objectives. Unlike most other industries, it is hard for ad agencies to reduce their cost of producing ideas without reducing their most precious asset—people. By reducing people, or hiring on less experienced staff at lower salaries, agencies actually reduce their ability to deliver on what their clients expect and need. Ad agencies need to perform everyday, yet there remains today a vast pool of talented people created by decades of “good enough” performance. The industry does not suffer from a lack of skills and expertise, but its excess.

What makes your agency truly unique?

In today's competitive marketplace, ad agencies need to Identify what makes their agency truly unique. Then, make sure everyone knows about it.  Forget selling in the old clichés such as:  "We offer more senior level attention" or “We do everything under one roof” or that you "work harder than everyone else." For certain, stop selling yourself along the lines of “cheaper and faster”. You need to articulate how and why your processes, approach, thinking and points of view are better than everyone else's. You need to show how your differences will ensure success.

The only way to rise above the fray is to show a prospect client the unique value you deliver. This may be based on strategy, proprietary programs, and domain expertise. Creativity and innovation are important too, but these days, value has to go beyond the creative product.

With the advent of new Internet agencies springing up, creative is becoming more of a commodity with new models like NuIdeaExchange, an online service that connects marketers with a la carte agency services using the principles of crowd sourcing to potentially drive down the costs of creative development. The company is banking on behavioral change, hoping a confluence of industry trends will prove the new business, a virtual marketplace for ideas, will help create a fresh model for the future.

And, much like eBay, where consumers look for items at bargain prices, professional creative services like NuIdeaExchange.com, OpenAd.net, and GeniusRocket.com are offering marketers cost-effective solutions (read “cheaper and faster”) from the convenience of their desktops. It may not happen today or tomorrow, but big changes are around the corner.

Sell your thinking

An agency's services are part high-value strategic thinking, and part lower-value tactical implementation. Historically, most agencies charged for implementation (media buying) and gave the thinking away for free.  When account planning was introduced, agencies held this up as a high-value, intellectual property-based service that it was. But once strategic development, creative and media strategy are broken out from an agency's offering, what remains is a whole lot of tactical implementation that doesn't differ much from agency to agency. Commodity services can not command a price premium.

For small and medium-sized agencies the way to reverse this trend is to focus on your strategic counsel and charge more for it. Charge more for the counsel and less for the implementation. Position your firm as one of thinkers who happen to do great work.

Abandon the “cheaper and faster” commodity route

Selling thinking by the hour, I believe, is the largest contributor to the commoditization and devaluation of an agency's services. Just as commodity prices (e.g.: pork bellies, wheat, corn and coffee) find a market equilibrium, so too do the prices for advertising, design, and PR services. There exists an XYZ formula by which agencies seem to compete: services are worth X per hour, the media buy is worth Y percentage, and Z is the amount of the monthly retainer. Without a compelling point of difference it is difficult to charge a premium over these rates. But the agency that quits selling its time and begins selling its services based on “value” to the client will inevitably command significantly greater margins.

Never justify the value of your thinking

One of the rules is to never justify the value of your thinking. Once you begin to explain why the price is what it is you open up the door to a discussion. And you will always lose. Once a client receives an invoice that details hourly rates and number of hours, you can be certain their CFO will pick it apart. Use your hours as a guideline but determine the final price by considering the value of your service to the client.

Adapt a “value” proposition or die

I recently saw an online ad agency survey which asked the question, “Does your agency have a unique point of differentiation from competitors?” Of the 430 agencies that answered the question, 76.8% (326) said that they did, 23.1% (98) said they did not. The article then posted 243 agency responses.

Reading through the responses was proof enough to tell me why the ad industry is suffering from an identity crisis. If we fail to differentiate ourselves in a way that makes sense to our peers, how can we expect clients to trust us to do the same for their brands? No wonder clients see agencies as a commodity business. No wonder agencies complain at pricing pressure and lack of loyalty. The key to building an agency business is to develop a real differentiated positioning that clients and your own staff can understand. It is amazing that every ad agency thinks they are unique. It’s  easy to understand why many clients think most agencies are alike.

As the changes in the marketplace necessitate changes to clients' marketing departments, agencies are having to adapt to stay relevant. You can’t help but notice the degree to which innovative ad agencies like Droga5, Weiden & Kennedy, Almap BBDO, and R/GA, are dominating both awards shows and client interest. They’ve shaken off the first wave of digital disruption and are proving their abilities in best-of-breed creative. This isn't surprising, given that their greatest proficiency is in ideas—and for marketers, that remains the most important service of all.

When it comes to offering “value” services to clients, WPP's Kantar Group, which is a consolidation of more than 13 individual companies, offers services outside of the creative arena, and has been described as “one of the world's largest insight, information and consultancy networks”. Their services are marketing based, not advertising, and include: channel and retail strategies, consumer and business insight, market research, marketing and brand strategies, marketing effectiveness, and marketplace and media information.

Since its inception in 2004, Anomaly (New York) bills itself as a new model agency and has shown a different way of doing things, blurring the borders between providing traditional marketing services and working as a business development partner.  Anomaly works to develop intellectual property (IP) for both itself and for its clients. It licenses its IP to clients in return for a share in revenues. Their aspiration is to be a product developing IP company, marketing their own portfolio of IP as well as doing that for major brands.

Another effort to help marketers produce advertising campaigns is the IdeaLists, housed on theidealist.com, an online creative marketplace that brings together clients and creatives. The slogan on the home page sums up the founder’s philosophy: “There are far more smart, creative people outside any single organization than within.” Marketers are able to post briefs that would interest copywriters, art directors and other creative types, no matter where they work. IdeaLists differs from the so-called crowdsourcing model of developing ads. For one thing, the website is open to professional members only. They can be individuals, agencies or clients asking for creative ideas, or they can take the creative role. With the crowdsourcing approach, marketers can often ask anyone, regardless of professional experience, to come up with solutions for their ad problems.

Stay true to your values

Searching for an answer to their ‘value’ perceptions, clients will ask how your agency can measure the success of your work. This is the point at which you have to put your money where your mouth is and be willing to risk it all.

The best answer one can give is: “On the success of their business”. If your programs and campaigns aren't driving the client’s business successfully, regardless of how creative or innovative you might be, you’re going to be terminated. The ad business is like that. Clients don’t take prisoners.  An agency’s work is only of value and worth the fees if we provide real value to our clients' businesses. If you are unwilling to be held accountable for your work, you can't expect the client to give it the value it deserves. We must recognize that we are in business to create "value". We need to shift our thinking from "'What does it cost us to generate the ideas a client wants?" to "What is the value of the ideas and services we create for our clients?"

Beware. Once you start working below your value it is almost always impossible to recover.

Pablo Picasso

Legend has it that Pablo Picasso was sketching in the park when a woman approached him to draw her portrait. After studying her for a moment, he deftly used a single pencil stroke to create her portrait. He handed the women his work of art. When asked how much he was owed, Picasso asked for the sum of five thousand dollars. The woman questioned why did the portrait cost so much given it took him less than one minute to draw it. To which Picasso responded, "Madame, it took me my entire life."

Mike Fromowitz

OCTANE

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