Why agency revenues are headed in the wrong direction

May 20, 2013 | Author: Tim Williams

A look at advertising agency industry financials shows that both income and profit has been steadily declining for at least the past two decades.  Some studies show up to a 40% reduction in total agency compensation.  Hardest hit are the media agencies, whose margins get thinner every year as a result of cost-based compensation agreements that get negotiated downward with every passing year.  The net effect?  Agencies are doing the same work for less money.

Actually, agencies are doing more work for less money.  Many of the non-traditional solutions recommended and implemented by agencies involve much more work than conventional media advertising.  It’s more than a little ironic that as agencies are working to provide more effective solutions that may require more time and effort, clients are pressing them to invest less time and effort.

Income Drain = Talent Drain

The income drain is having profound effects on the agency business.  Even without consulting a spreadsheet, agency principals are painfully aware that they have fewer financial resources with which to hire and develop talent, which is the backbone of a professional knowledge firm.  Some recruiting firms report that agency professionals could earn up to 30% more by switching to the client side.

If the decline in agency compensation continues, the talent drain continues, and soon agencies will be relegated to a role of commodity service provider.  Not a very rewarding career path for the kind of bright, entrepreneurial people that are traditionally attracted to the agency business.  It doesn’t have to be that way.  But the solution isn’t to change how agencies work, but rather to change how they think.  Only then will they be able to change how they are compensated.

Several steps backwards

The simple fact is that the methods by which agencies are compensated have been headed in the wrong direction.  When agencies moved from commissions to fees, it created the illusion of a more progressive compensation system.  The argument from both agencies and clients was that by counting hours and billing for time, agencies would get compensated for exactly the amount of service they provided – no more, no less.  Agencies professionals were taught to sell themselves as “brains for rent,” and the mantra became “the only thing we have to sell is our time.” 

But in many ways, the commission system was more value-based than the cost-based fee system because in theory, clients would spend more marketing dollars on work that’s producing results, for which the agency would earn more income.

The commission system also allowed the agency some financial room to put it’s best people on the business, experiment with the best staffing mix, invest in proactive thinking, and provide better and more consistent strategic counsel and advice.  With hourly-based fees, unless that time is precisely estimated and accounted for in advance, the agency is at risk of reducing its profits. 

The current cost-based system is a step backward on the value continuum because no matter how you slice it, there is absolutely no direct correlation between cost and value.  Cost-based agreements essentially assume that clients are buying inputs instead of outputs, hours instead of outcomes, efforts instead of results – costs instead of value.  It sounds a little ridiculous when framed in those terms.  That’s because it is ridiculous. 

Benefits, not features

Agencies preach to their clients that customers don’t buy product features, they buy product benefits.  Consumers don’t buy a one-inch drill, but rather the expectation of a one-inch hole.  Applying that same logic to what an agency is selling, clients aren’t buying the hours you put on a timesheet – they’re buying the expectation of outcomes.

What is your value proposition?

May 13, 2013 | Author: Tim Williams

If you’re like a lot of business executives, you may be concerned that you haven’t adequately defined your “mission” or “vision.”  These often feel like buzzwords, and that offsite planning sessions that seek to define them often end in a bland statements that reflect more compromise than courage.

A well-defined mission or vision can be of immense value to an organization, but the real question agency executives should be asking is “What is our value proposition.”  On the surface, this may feel like a soft concept as well until you examine what it really means.  Quite simply, a “value proposition” is an articulation of the value you create for your clients.  Ultimately, this is the most important question a business enterprise can answer. 

A strong value proposition means a strongly focused team, a strongly appealing business model, and ultimately a strong margin.  More than one observant business consultant has observed, “No margin, no mission.”  The starting point for discussions of lofty concepts like mission and vision is value.  A business exists to create value outside of itself.  Indeed, creating value is the only reason for a commercial enterprise to exist in the first place.

Defining the value you create for your clients

How do you go about defining your value proposition?  Start by clearing your mind of shop-worn concepts like “quality,” “leadership,” and “delighting customers.”  It’s not that they’re not important; they’ve just lost their meaning.  This kind of hyperbolic language also does nothing to distinguish your offering from others.  And it does little to get you to the real question of value.

When agencies develop creative briefs for their clients’ brands, the section labeled “consumer promise” or “key benefit” is really the value proposition of that brand.

You have a value proposition whether you know it or not, and every value proposition will fall somewhere in these three areas:

Points of Parity are those that are generic to the category.  A marketing communications firm is expected to deliver excellent client service, quality work, etc.  In my work with agencies over the years, I have identified what could be considered the “top 10” Points of Parity.  No doubt most of these will look very familiar:

1. We’re full service
2. We’re integrated
3. We offer a wide range of experience
4. We’re media neutral
5. We’re creative
6. We’re strategic
7. We’re your marketing partner
8. We’ll give you the attention of senior people
9. We produce results
10. We’re fun!

  When agencies lean on points such as these as their value proposition, they are contributing to the vast “sea of sameness” described by most agency search consultants.  As search consultant Bob Lundin once observed, “The common failing among agencies seeking new business is their inability or unwillingness to name what they stand for.”

Points of Relevance are a step in the right direction.  Simply asking the “relevance” question means you are narrowing your target from “everybody” to “somebody.”  Rather than a generic listing of generic benefits, it is a specific listing of specific benefits based on relevance to a particular type of category or brand. 

Points of Difference are the highest order, and point the way the defining and articulating your value proposition.  They are obviously also the most difficult to define, because they involve the most sacrifice.  By articulating a Point of Difference, you are saying not only what you are, but what you are not.

Not surprisingly, most value propositions fall squarely into the “Points of Parity” for one of two reasons:

1. The leaders of the firm haven’t devoted the time and attention required to understand how their firm creates value. They simply assume that trying hard and “being your best” are the keys to success.  But just as “hope is not a strategy,” “trying hard” is not a strategy, either.
2. The firm has in fact attempted to articulate its value proposition, but still hasn’t moved beyond “Points of Parity,” because doing so requires too much sacrifice.  They want to be all things to all people.  They want to appeal to every type of client by offering every type of service.

Getting to relevance and differentiation

Points of Relevance and Points of Difference can be defined by applying both analytical and creative thinking to questions like:

• What business categories or industry segments do we know best?
• What kinds of clients have we been successful in attracting in the past?
• Which communications channels do we know best?
• Which consumer touch points do we know best?
• What distribution and delivery channels do we know best?
• Which internal and external brand stakeholders do we know best?
• What kinds of audiences or market segments do we know best?
• What types of brands do we know best?
• What differentiating methods and approaches do we use?
• What kind of special knowledge and expertise do we possess?

This is much the same journey you take when developing and defining an agency positioning, because a positioning is ultimately a value proposition.