If there’s more money being spent in marketing than ever before, why is average agency income (and agency profit) declining? Let’s count the ways:
1. AD TECH
For starters, there’s an entirely new class of advertising technology companies that didn’t even exist just few years ago. These companies are taking a huge bite out of every marketing dollar (at least in digital, and sometimes even traditional media), leaving not only less for agencies, but actually less for the media as well.
2. FREE AGENTS
More of the value that used to go to organizations (agencies) is going to individuals (freelancers and the global open-source talent pool). In fact, there are now examples of major marketers like Intel and Sony drawing from multiple external resources in a type of “Free Agent” model.
3. IN HOUSE
Then there is the somewhat menacing trend of clients taking more and more of their work in house. Seasoned agency professionals know in-house marketing groups have see-sawed back and forth over the decades, but this shift seems quite permanent, as marketing organizations license software and leverage technology to do more of the work themselves.
4. AGENT’S DEMISE
Last, but certainly not least, is the overriding mega-trend that could be characterized as the death of the middleman. The demise of the “agent” (travel agent, insurance agent, advertising “agent”) means marketing dollars are going directly to providers of production and media services, never even making a stop in an advertising agency.
“As this relationship changes,” observes advertising practitioner Dylan Mouratsing in Admap, “remuneration across the value chain will need to be re-evaluated.” In other words, as marketing money moves away from intermediaries like creative and media agencies, we’ll need to learn how to create completely new forms of value. Indeed, this redistribution of value means agencies will need to look in entirely new places for sources of revenue. We need to ask, “How can we redeploy our talent and problem-solving abilities in ways that are not dependent on marketers writing us a check?”
One standout example is the new R/GA Accelerator unit. The agency identifies and recruits new start ups in need of marketing help (meaning all four P’s of marketing, not just Promotion), then assigns special teams from the agency to help with the specific needs of the start up — from branding to product design to web development. In return, R/GA receives an equity stake in the start up. So far, they have a piece of more than 70 companies, betting one or more of these companies will make it big. San Franciso’s Ammunition Group — designers of products like Beats — often takes a similar approach, taking equity in place of time-based billing.
The Portland Incubator Experiment (PIE) backed by Weiden + Kennedy is a another example of agencies as accelerators. PIE’s Renny Gleason says “Successful start-ups are in a fight for their lives and must operate accordingly. Agencies are also fighting for their lives, but don’t all know it yet.” More importantly, Gleason advises “Agencies that can’t find ways to generate value in today’s emerging value ecosystems will find themselves marginalized by the innovators who do.”