Manhattan Marketing Maven

Agency Pricing & Fees -- Benchmarks Revealed

Money makes everybody crazy. Money makes agency executives especially crazy because they are under constant pressure to close business at double digit margins in a marketplace that undervalues agency services. The magic that agencies make is often considered and bought as a commodity.

In a world where clients  buy marketing, advertising and PR services using the same criteria and the same purchasing professionals as they do for buying raw materials and office supplies, setting prices and extracting fees that have any relationship to value delivered is a source of continuing anxiety. Managing competitive pricing while simultaneously managing doubts about the perceived value of agency brands, agency negotiating skills and agency lead generation and selling skills is the target for the newly released Fees & Pricing Benchmark Report produced by RainToday and the Wellesley Hills Group.

This 80+ page book incorporates survey data from 343 professional services firms in the marketing, advertising, and PR industry mixed with analysis from RainToday, a leading sales consultant to professional services companies. It is loaded with data on rates, pricing, fee formulas and selling tactics.

The data shows that the truths agencies tell their clients are equally true for them. Brand awareness and perception drive demand. Brand leaders can charge more, discount less, earn better margins and more frequently manipulate the pricing/billing models. But accomplishing these things isn't easy even for firms with household names. The report documents an industry-wide insecurity about what clients will pay for services, what is the genuine business value agencies deliver to clients and the worry that agencies leave too much money on the table because they aren't good salesman or negotiators.

As you might imagine, the topics on everyone's mind -- those cobbler's son issues that agency executives whine about at the 4As and other venues -- get thorough coverage in this report. Here are some of the key take-aways:

• Almost everybody pays attention to the "going rates." Clients always give away competitive prices during pitches. Many firms actively scout and watch their competitors
• Fixed Fees are very popular because it gives clients predictability and to a certain extent finesses  client's questions and arguments about time/rate/skill/margin mix.
• Everybody discounts. The average variance from the rate card is 25%. Brand leaders discount less frequently and fewer dollars. Bigger firms discount more because they can.
• There is significant experimentation with value-based pricing. But there isn't common definitions of how to do it and no consensus on how clients measure the business value delivered from agency services. Only a third of firms use contingency or success fees in their billing formulas.

Amid the countless charts and verbatim quotes, the emergent prescription for agencies is:

1. Invest in business development. Get serious about lead generation and pipeline management. Aggressively target clients who you know will be right for your firm.

2. Invest in your brand. Make it different and distinctive to attract new business and substantiate better prices and margins.

3. Learn how to sell and negotiate. Get over yourselves. Stop bellyaching about the encroachment of consulting firms and others. Know when to walk away from a global brand with an inadequate budget. Don't let the bean counters push you around.

Perspectives on the Pathetic Pitch Process

I sat through 5 sequential pitches this week and was dumbstruck by how ineffective the process is in helping buyers learn what agencies can do for them. The artifice of the stand up pitch was unproductive, pitiful and pathetic.

Maybe in a world where finding a relationship is so difficult, I should have expected dysfunction but having been either a pitchman or a decision-maker so often I surprised myself at how awkward and flawed this familiar process is. Given how they meet and match, its no wonder that clients and agencies divorce at rates exceeding the collapse of individual relationships.

If we are deconstructing the process let's start at the beginning with mismatched expectations. Clients identify agencies that look like they can do the job. The usual criteria are industry experience, service to like clients, previous gigs with competitors, contacts between the two sides; usually somebody knows or previously worked with somebody and agency brand awareness and reputation. My team constructed a list mixing big guys with specialist boutiques and floated a middling RFP to solicit the basic credentials.

What we really wanted to find out was:

1. Can these guys really help us? Can they use their skills to move our needle not just do their usual act?

2. Will they really get to know us and our schtick or will they just apply a template approach and hope for the best?

3. Can these guys think about our business the way we do? Will they help us realize our goals?

4. Do they know anything we don't? Will we like being with them? Do they fit our style and pace?

On the flip side agencies are looking to find clients that will pay top dollar at healthy margins on time, help grow the agency's reputation and bag of tricks, keep the agency team interested and engaged and not be too much of a pain in the ass.

The agency guys really want to know ...

1. How much do these guys really know about what we do? Can we genuinely make an impact or will be just be somebody's bitch? Will they rely on our advice versus telling us what to do?

2. Every client says they want creativity. 80% buy plain vanilla. Are these guys in the risk-taking 20 percent and if so why?

3. How bureaucratic or process-driven are these guys? How many can say "no" versus how many and who can say "yes"? How much will they annoy, de-motivate and generally mess with us?

4. Can they pay the freight, will they nickel-and-dime us to death and are their pockets deep enough or flexible enough so that we can develop cutting edge new stuff on their dime?

So into the conference room go two teams sitting around a table, collectively focused at a projected slide, occasionally looking the other side up-and-down wondering about haircuts, decolletage, accessories, VPL and nasal accents desperately hoping for something good to happen. Here's what generally happens:

Big Guy Blabs. The senior agency person commands the presentation by leading the pitch and answering or parrying most questions. The senior person usually has the uncanny ability to put off the senior clients in record time.  Everybody understands the ego at-play as much as they understand that the two scared, silent young ones wearing cheap suits sitting in the cheap seats will actually end up servicing the account after all the blovating is done.

Big Idea Bombs. The agency bets the farm on a out-of-the box idea or a pedestrian idea that clearly indicates they don't understand the first thing about the client's business. This rhetorical Hail Mary pitch falls flat and the air goes out of the room like a tire with a fast leak. After its clear to both sides what a bomb the big idea has been neither side can wait to get out of the room.

Bad Mix. The sides hate each other on sight. There is no mystery, chemistry or fantasy. Its like being at a bad freshman mixer. You feel like you're in the wrong place. You can't imagine being seen much less working with people who look, talk, act, think like those guys. You are viscerally and emotionally put off by the number, quantity and oddity of the fashion don'ts and fatties set before you. 

Bullshit Blab-a-Thon. The agency works through the slides and invites questions by saying , " We want this to be a dialog. We want to be your partners. So ask us anything along the way. Feel free to interrupt us so we can really talk about the things that matter most to you."

The clients then ask questions. With each pointed question, the agency parries. By the third one you realize that the agency never answers the question asked. Instead like a weaselly politician the agency uses every question to reinforce or restate its key copy points. The more pointed the questions; the mushier and more evasive the answers. The more they blab, the more you can feel your blood pressure rising.

Process Parity. Every agency has a process. Usually it has a not-so-clever name and from 5 to 9 steps. It is presented in hushed and reverent tones and granted the potency of a magical formula handed down directly from Merlin. According to the agency, this sacred process insures blinding insights into customer behavior, exceptional creative that will make products fly off the shelves, unparalleled ideas that will forever change your market and unlimited success for this campaign and anything else the process touches. But whoa to those who don't follow or embrace the process. Like Old Testament sinners those clients who don't embrace and genuflect to the process are condemned to bleakness, doom and the same old shit.

Bashing Competitors. Agencies are fundamentally insecure. They position their strengths in ways that bash the unseen and often unknown competition by saying things like " We're specialists. You wouldn't go to a GP for a complicated lung operation would you?"  Or the say, "Your business is part of our DNA. We're not a multi-functional, multi-national conglomerate where you'll be treated like a pimple on an elephant;'s ass." Or they promise "We have the breathe of experience, contacts, skill and economies of scale that those little guys can never deliver. We're smarter, faster, cheaper and better." 

By attacking the unseen competitor, the agency makes the prospective client feel like an idiot; as if he didn't consider size, scale, experience in selecting potential agencies or as if he randomly picked names out of the phone book or rounded up the usual bunch of suspects. When each agency fires pre-emptive strikes into the darkness it feels like the last time you broke up with somebody who didn't want to break up with you. They assure you that you'll never find anyone else as good and that you'll be condemned to sit alone in a dark room masturbating for eternity. Its a pitch that never really works.

The next time I have to hire an agency, I'm going to define a problem we face in the business and a needed outcome. Then I'm going to put both teams in a room for 90 minutes and see what they come up with. This should give me both a feel for agency credentials and chops as well as a realistic chemistry and compatibility check. It will be messier and a lot less formal but it will spare me hours of torture. 

Ad Agencies Fighting Commoditization

Advertising is increasingly bought by purchasing criteria where ideas are valued like paper clips.

Add to this mentality a constant demand for process efficiency tied to downward price pressure on the pay-for-hours model and you understand why agency executives feel like fish squirming on hooks. As a result the search is on for alternative revenue streams and pricing models.

Conjecture about new models and the interaction between or coalescence of buyers and sellers was heightened by Microsoft's and WPP's purchases of ad serving firms last week. Some firms like aQuantive have "idea labs" to cook up new business opportunities and new business models. IPG has a "Futures Marketing Group" seeking similar results.

Doug Weaver, President of the UpStream Group frames the issue in terms of business models, according to Michael Estrin writing for iMediaConnection, He coined the phrase "The Oreo Doctrine" as way to distinguish between transactional media sellers and nimble problem solving consultants advising client firms. He argues by analogy that the cream filling sticks only to one side so, Weaver reasons, every organization has to choose which side to be on since you can't have it both ways. In Weaver's world you're either peddling media standardized units or peddling answers to problems; the former makes you into a commodity, the latter is your shot at fatter margins.

Transactional players, in his view, need to deliver the greatest efficiency and automation which probably involves outsourcing and requires a firm to develop proprietary math, software and systems not too mention an on-call geek squad to read the results. In contrast "marketecture" firms, a term I always thought was coined by Marty Bell at Prescients, refers to general contractors serving CEOs as trusted advisers nimbly addressing business issues without any media ax to grind. By proactively identifying client issues and "writing your own briefs" these consultants, possibly collaborating with competitors on client tasks, will save the day and the bottom line.

Compare Weaver's take to moves taken by agencies, chronicled by Brian Morrissey in Adweek, to monetize tools and find new revenue streams and more margin in new services.  In this world view agencies figure out how to serve ads, build networks, auction or arbitrage media, create software for specific applications, create content aimed at discrete audiences and offer consulting services.

They also take fees in stock and warrants rather than cash, charge based on performance or results achieved and share revenues based on their licensed inventions. Some spin out separate companies to sell these wares and others, like JWTIntelligence.com will sell via eCommerce.

The huge advertising holding companies have been fighting like mad to hold the line on pricing and to resist the pressure toward commoditization. They are continually hammered and have few effective tactics to withstand the increasing demands of large clients. The smaller guys have been forced to either give in or get creative though so far there is no broadly applicable strategy for saving agency margins beyond a willingness to experiment with risk.      

The Promise of Agency Digital Czars

A flurry of hiring among traditional agencies designed to create visible C-level digital advocates is a first step; one that has been tried before with uncertain results. Adweek's breathless celebration of this latest PR move is overstated.

Consider the situation. Large and bureaucratic holding companies with multiple agency brands acting like independent duchys serving disparate agendas had no visible digital gurus to parade before and pontificate to clients. Now some do.

But the addition of Jean-Phillipe Maheu to Ogilvy or the inclusion of David Kenney in the councils at Publicis or even the insertion of Brandon Berger at MDC or Mike Parker at Goodby opens the conversation but doesn't solve the problem that traditional agencies don't think digitally, don't have the right talent, haven't invested in or partnered to get the right technology infrastructure and still make big bucks and bonuses from TV and print ads. Spokespeople sometimes open the door but hardly ever deliver the products or services.

The real determining factor will be the affect of these individuals and others can have on the risk appetite of agencies and clients. To truly succeed, which means catching up with savvy marketing services firms and digitally innovative clients like Nike or Apple, these "czars" will have to be incredible salespeople and masterful change agents within their own organizations diverting attention, focus and resources away from the status quo. And then they'll not only have to dazzle clients with big ideas, they'll have convince leading brands that experimental ideas can yield affirmative ROI, build brand images and create new demand and then they'll have to finesse client organizations to get the ideas produced and into the market.

Its a much bigger deal than just hiring a guy who can mix it up with the digerati and who has a few friends on MySpace, an avatar on Second Life and can yammer about Web 2.0.

 

A Different Take on the Digitas Deal

Maurice Levy’s billion dollar purchase of Digitas has set tongues wagging about digital agencies. It’s a scene out of Rumplestiltskin. The sleeping industry awakes, is stunned by a changed reality and – POW-- flexes its checkbook.

Publicis has a different ethos than Omnicom, WPP or IPG but its still a balance sheet play in search of an operating model and a client rationale. Synergy has eluded all the advertising holding companies as has significant client cross-pollenization. Every company has digital assets. No one has found an easy, seamless or particularly effective way to integrate them into client work. Its hard enough to get them to make nice to each other.

Fundamentally there are mindset, legacy, leadership and compensation issues that stymie any real cooperation and integration. Maybe we have to wait till the old generation of white shoe ad guys and 40ish British wunderkinds passes from the scene. But by then the ad agency business will be dead and gone.

Achieving an ROI on this deal depends on leadership, evolving a new operational model and the cross-fertilization of people within the larger company. If this doesn’t happen and happen soon, the only value will be Digitas’ $380 million in revenue, 20+ points of margin, a few marquee client names for the lobby wall and bragging rights.

David Kenny’s hope to expand globally using the Publicis network sounds good though its hard to believe that Digitas clients, who were reluctant to give them work outside the USA as a stand-alone firm, will rush to embrace their new and mostly clueless partners when it comes to digital assignments. (Full disclosure: I lead this effort before 9/11.) The hope that clients who picked Burnett or Saatchi will instantly turn to Digitas for digital help is more about account relationships and sales skill than magical new synergy.

There will be some media advantages both in terms of online experience, savvy, media relationships, best practices  and volume discounts though it will be interesting to see if a TV oriented bureaucracy like Starcom Mediavest can or will learn anything from Carl Freeman’s merry media band.

Similarly Levy is acquiring a talent pool, though even Digitas has been scrambling lately to find seasoned digitally-oriented players and has made several alliances to get the technical chops it cannot effectively recruit. The question, that could well determine the true value of this move, is will they keep the talent concentrated and direct other teams to rely on specialized units or will they disperse Digitas account, strategy and analytics people throughout the organization so that the thinking, consciousness and mindset of the new media world gets inculcated across brands and across client teams. 

Don’t believe the hype in the ad trades that this acquisition jumps Publicis from worst to first in the digital space. The Levy-Kenny love fest will not last after the deal closes. Kenny will have to win over an executive committee that may talk the talk but hardly walks the walk. Watch and see what –if anything – they do with the new asset.

Why Ad Agencies Can't Respond to John Stratton's Warning

Verizon Wireless CMO John Stratton went to Ad Age’s “Hollywood and Vine Conference and told the 400 ad agency poobahs what every client in American already knows -- the ad agency business is overwhelmingly focused on itself NOT on clients.
His eight point indictment explicitly articulated what many clients have been thinking for quite a while. His points were …

Agency Bills Under Scrutiny

The Shona Seifert conviction raises to broad consciousness the billing practices of ad agencies which have been notoriously opague for as long as anyone remembers.

Agencies lag behind law firms, accountants and other professional service organizastions in making investments in sophisticated billing technology. And as Shona Seifert said in her testimony filling out timesheets accurately and on time is counter intuitive in most agencies.
Anyone who has ever worked in an agency knows how difficult it is just to get the time sheets filled out and collected, much less assess accuracy and/or forecast revenue yield.

As a result it is not unusual to get a convoluted bill. And it's almost impossible to measure cost versus value received. Perhaps the revelations of the way-less-than best practices at Ogilvy will inspire agencies to improve their billing performance and to make financial issues more transparent to clients. Let's hope so.

The Last Hope for Ad Agencies

Ad agencies have always been at the mercy of client anxieties. And agencies have always been the whipping boys for all manner of brand or product performance issues. Everyone understands that agencies exist so they can be fired. Everyone also realizes that the core agency value proposition is either “we know or can do something you cannot” or “ we have arms and legs to get things done faster, better and/or cheaper than you can do it yourself.”

But in the last few years agencies have had even more tenuous relationships with their clients. The list of clients that broom agencies quickly seems to be growing. Skip Pile’s latest research indicates that clients change agencies, on average, every 2.5 years, twice as frequently as before. There are all kinds of reasons but the bottom line is that few clients believe that agencies are long-term partners.

You can’t be a partner if they don’t know you well. Rarely are agency chieftains, part of a client’s inner circle. It is unusual for agency heads to be considered the CEO’s or even the VP Marketing’s consigliore or to even have a voice in crafting client strategy. Instead agencies and their leaders have become receivers of strategic output and implementers of tactical plans.

Very few clients believe that their agencies actually know the fundamentals of their business, their category or the critical processes within their enterprise. Agency expertise is understood as generic, plain vanilla project management.

And even that role, too, has a built-in trap. Aggressive cost controls and benchmarking have given savvy clients unusual leverage. Many specify upfront the time, cost and staff to produce a postcard, a website, an e-mail campaign or a #10 mail package. Few are willing to pay for anything but minimal staffing. Even fewer are willing to pay for senior people who allegedly bring added value, insight or experience to their accounts.

Yet agencies, from the 2-person shops to the global conglomerates, seem to be impotent to affect the size, timing or sequence of client spending. Agencies are output. It is a sobering thought, which fundamentally changes the game.

Yet changing these circumstances requires changing the way agencies do business. Consider a few key areas.

Leadership. Clients hire agencies that have a point of view. If you don’t have a POV you are just another vendor cranking out pretty pictures or punchy copy. Unfortunately too many agencies either haven’t developed or articulated a distinguishing POV or are unwilling to expose their POVs for fear of rejection. In a corporate environment that is naturally risk averse, having a POV is a point of distinction, which must be leveraged to an agency’s benefit.

DM agencies especially have practical knowledge not only about a client’s strategy but generally understand the distribution channels, the media, contact centers, customer service, fulfillment, retail traffic patterns and nuts and bolts operational reality. Agencies are often in a position to traffic information, data and ideas among and between different business units and to infuse grand schemes with a healthy dose of reality.

Leadership requires agencies to get out ahead of their clients by thinking through and anticipating events, sketching out likely competitive scenarios and contingency plans, understanding the personalities and power dynamics within client organizations and presenting “crazy” ideas or trial balloons for client consideration.

Doing this requires proactive thinking and investment spending. It also requires that we train junior people how to do these things and use senior, seasoned people to get top-level access and to put this stuff across persuasively. Account people who take reasonable risks, get beyond the day-to-day and become trusted, memorable or effective on the basis of their personalities play a critical role in offering clients the leadership they crave.

Efficiency. Developing tools to train, manage, deploy and effectively use agency resources is critical to maintain margins and grow profitable businesses. In the wake of the Seifert conviction, it will be critical to answer skeptical clients questions about rates, billing and productivity. Though most agencies have adopted the professional services fee model, they haven’t used professional services norms to maximize the value, productivity and utilization of their people.

This is not a software problem. It is a matter of understanding who is working and what they can do and mapping these resources transparently against client needs in real time. Improved real-time resource planning in-tandem with clients is a necessity.

Agencies have not parsed work among or between teams to capitalize on expertise or economies of scale. Nor have they used time zone differences, cost differentials or global resources to move projects ahead faster or to squeeze out better margins. Force utilization tactics and productivity measures, beyond counting billable time, are virtually unknown in the ad business, even though other industries have used these techniques to great effect in reducing costs and cycle times while motivating their best people.

Alliances. Every agency has loads of alliances. They are usually touted in press releases. Yet few can actually capitalize on these relationships to the benefit of clients. And while they sound good in credentials presentations, far too many agencies can’t, don’t or won’t leverage these alliances because they cannot control the ally’s end product or they fear disintermediation.

These twin demons --- paranoia and the need for control – have undercut most agencies claims and seriously burned credibility in offering clients the ever elusive “integrated solution”. The ability to leverage resources within networks is still the exception rather than the rule and has led all but a few clients to reject the idea that they can get full service from any one holding company.

Clients believe that each agency has one or two core strengths. Nobody really believes that any given agency is tops in everything. Having, using and delivering credible, expert allies is critical to consolidating, maintaining or expanding any standing with the leading marketers and brands, especially at a time when they are working with skeletal staffs.

Being able to field a coordinated team of agencies who will uniformly understand client objectives and culture, work in a coordinated manner, deliver against integrated timetables and husband precious marketing dollars is the Holy Grail. Orchestrating alliances is the best chance for finding and delivering the Grail to our clients.

Leadership, efficiency and alliances are three areas directly controlled by agencies. They have traditionally influenced relationships with clients. Attacking consulting firms and whining about the economy isn’t the answer. Leveraging agency assets is the only hope.