July 28, 2014
What Are Agency Services Worth?
I spent 40 years in the agency business. For about 35 of those years I was in agency "management." By that I mean I was a shareholder or partial owner of an agency.
One of the most confusing parts of managing an agency is figuring out what to charge clients.
When I started, it was pretty easy. Generally, we got the equivalent of a 15% commission on media spending. Sometimes, it was structured as a true commission. Sometimes it was structured as a fee based on an implied commission. Most times it was a combination of things that added up to somewhere in the neighborhood of 15% of the marketing budget.
That model died a long time ago.
It died for several reasons. First, clients felt that the assumption that agency services were worth 15% of their budget was too generous. This was both true and not true. In the case of very large media budgets, agencies probably earned too much. In the case of small to moderate media budgets, agencies earned too little.
The model has changed radically, and it is very hard to find a consensus on how to calculate the value of agency services. Each agreement seems to be negotiated ad hoc, with no standard to go by.
Agencies generally struggle to make a decent profit. Managing an advertising account is far more time intensive than it appears to outsiders. This is particularly true when a substantial component of the activity is web-based. Web stuff devours hours.
Generally, an agency's profit margin is the difference between what it really should be providing to clients and what it can get away with providing.
The reason for this is twofold. First, agencies have gotten too process oriented. Process takes time and resources. In other words, it's expensive. And process doesn't do much for the client. It's mostly about keeping the agency systems and people on track.
The second reason is client incompetence. Agencies are often forced to deal with low level functionaries who give the agency bad direction, incorrect information, or are guilty of inept decision-making. This leads to endless meetings and limitless rounds of strategic, creative, and media wheel-spinning.
When the real decision makers finally get a look at the result, the agency often looks like it has spent mountains of time and money foolishly.
One of the biggest problems agencies have when it comes to calculating a fair compensation model is projecting how many complicators are going to interpose themselves between them and the real decision makers.
One of the biggest problems clients have in comprehending why agency costs are so high is understanding how much agency time they waste needlessly.
In the long run, the only unique asset an agency has to sell is creativity. Clients can get everything else elsewhere, usually for less. If your creative contribution is not highly valued by your client, you have no compensation leverage.
In other words, agencies should strive to do good creative work if for no other reason than it is good for the bottom line.