According to data from Kingston Smith, average marketing agency profit margins have gone from 30% in the 1960s to 9% in 2018. The existing model of time-based pricing is failing and agencies face competition from big consulting, the FANGs and client insourcing.
Charging by the hour encourages agencies to put more people on client projects rather than focusing on the value delivered. Marketing agencies, solicitors and the big consultancies all suffer from this model – are you focused on monetising supply side assets or creating value for your client? Maintaining all capabilities in house then requires these to be ‘utilised’. Agency strategy is driven by ‘utilisation’ of internal assets rather than ‘value creation’ for clients.
Client value sees a much greater focus on creativity, innovation, and effective execution. This requires partnership with clients based on collaborative, shared goals – not negotiated commercial terms based on client procurement playing off commoditised and competing agencies. It places greater emphasis on brand safety and the elimination of ad fraud. It downgrades the vanity of impressions, likes and clicks (quantity) in favour of engagement, action and purchase (quality).
Agencies must focus on creating value for clients. They must organise around client challenges and bring the right skills and capabilities to bear on tackling these challenges – and free themselves of having to have all these skills and capabilities in-house. This is a model that values creativity, innovation and execution and engages via a consulting model and draws on a network of in house and external skills and capabilities.
In this network model, agencies are a hub with key creative access and management talent. Resources are contracted across a network or independent specialists, free lancers and partner organisations – freeing the agency from the tyranny of keeping ‘assets’ utilised.
A new, effective agency model is required with new tools and processes to manage this model:
# 1: Relationships built on partnership. This starts with mutually agreed measures of value and goals – which then need to be measured. Clients need to see simple, transparent measures of value delivered, such as: Return on Marketing Investment; cost-per-action / acquisition / sale; and, cost-per-engagement. Achieving this requires agencies to understand their client’s businesses challenges – and as clients invest in building up this understanding and agencies in responding, switching costs grow.
# 2: Agencies must work with clients to find answers (and avoid pretending they have all the answers) – this builds on point 1. This is based on the scientific method – together clients and agencies agree on hypotheses which they then test. The analysis – based on clear data – provides answers. A given hypothesis either proves correct and investment can flow behind this; or incorrect, and alternative hypotheses need testing.
# 3: New fee structures that reflect value generated. Agencies (should) provide innovation and marketing execution. Fees should focus on value delivered and not ‘work done’ or cost plus. Clients want innovation – new ideas, validation of these ideas and then deployment. This needs talent and a more consultative approach – which needs to be paid for. Clients also want effective execution on investments behind successful marketing ideas/approaches – where fees might mix a basic retainer with payments for results.
# 4: Organise networks of skills and capabilities. Scaling up and down solutions and campaign execution models is critical and cannot be constrained by ‘utilisation’ concerns. If a campaign is not working, you don’t wait until it finishes to evaluate, you need to shift gears immediately. If a new channel or new capability is required then in-house availability should not be a constraint. New skills are required to support this solution agility. Networks of in-house and external resources need clear contractual models, straightforward commercial terms, clear communication processes, ease of plugging in an out, etc.