To understand the changing dynamics of the “value chain” concept, observe what’s happened to the music business.  Consumers are still spending roughly the same amount of money on music, but the money isn’t going to the record companies and music stores; it’s going to iTunes.  The money in the music business value chain is still there – it just moved.

The same is happening in the advertising agency business.  Marketers are spending, but they’re spending in areas of the value chain that aren’t owned by agencies.  Instead of trying to squeeze the last bit of value from traditional sources of revenue, agencies should instead be focused on finding a different spot on the chain.

Finding the most profitable areas of the value chain

To continue to profit in the marketing business, agencies must select a place on the value chain where the offerings are still underdeveloped. The problem is that most agency business models are still centered around the idea of “production and distribution of advertising” — a spot too far down on the value chain to have any real or perceived value in today’s multi-channel marketplace.

Here’s how to think about your firm’s value proposition:

Most agencies base their value propositions on overdeveloped services; they are placing themselves on the wrong side of the value chain.  By focusing on the underdeveloped features or benefits of the category, you are in effect not just positioning your brand for where the profits are, but for where the profits will be.

Underdeveloped offerings in the agency world include:

Online Account Planning

While many agencies have a well-developed account planning function, they have yet to fully realize the potential of the internet in gleaning customer insights.  For example, in addition to using traditional account planning tools Butler Shine Stern & Partners uses services like MotiveQuest to track consumer behavior for client Mini.

Analytics

Virtually every agency can benefit from adding the discipline of analytics.  Besides helping to meet clients’ demands for accountability, analytics can serve as the foundation for value-based compensation agreements.  Kansas City-based Bernstein-Rein promises clients the ability to “organize, evaluate, measure, and interpret the right data to make it valuable.”

Social Media

As the marketing value chain continues to emphasize non-paid online solutions vs. paid offline solutions, agencies must establish competent services and tools to help their clients maximize the world of social media. Media Logic, an innovative agency located in Albany, New York, has a suite of resources that help them monetize this important area.

Other underdeveloped agency services include:

Digital: Usability testing, behavioral targeting, software application development (think smart phone apps)

Branded Content: Custom publishing (both online and offline), branded channel development

Customer Relationship Management: Customer database analysis, customer service programs

Reputation Management: Online reputation monitoring and reporting

Conversational Marketing: Conversation strategy, online community development

Customer Engagement Marketing: Crowdsourcing, product co-development

Intellectual Property Development: Content syndication, sale or license of IP

And much more …

So now the question is, which side of the value chain are you on now, where do you think you should be, and what are you doing to get there?