Study: Agency and Production Costs Keep Rising Despite Efforts to Cut Them

Percolate Finds Big Brands, Traditional Media Fuel Rise

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Agency, production and research costs make up around 40% of advertising budgets and around 20% of overall marketing budgets, and they're growing despite widespread efforts by marketers to contain them, according to a survey of 300 senior marketers across industries by marketing software company Percolate.

Credit: Courtesy of Percolate

Widely and somewhat controversially dubbed "non-working media," these costs are something of a catchall to describe things other than the cost of paid or "working media." They include fees for advertising agencies, talent, production and the market research behind creating and evaluating the ads and content.

Even as chief financial officers and procurement departments have pushed marketers to control rising "non-working costs," other marketing trends were seemingly working at cross purposes in recent years. For example, creating videos and other content that can be distributed and shared for free or hosted on marketers' own websites simultaneously reduces paid media costs while increasing the cost of creating a larger variety of content.

Yet that may not be at the heart of the upward pressure on non-working costs that Percolate found. Somewhat surprisingly, "traditional media" ads had the highest percentage of non-working to working media costs of any category in the breakdown at 50%, besting "brand publishing," social media and other efforts.

Source: Percolate

That came as a surprise, said Chris Bolman, Percolate's director of growth. The company is following up to determine why traditional media is such a driver of "non-working" costs, and may delve separately into TV, out of home, print and radio in future surveys.

About two thirds of respondents said their non-working media costs are rising, and about half said they feel they're already too high. That includes more than half of the marketers in packaged goods, professional services, retail and manufacturing.

Online display ads topped the media where marketers felt non-working costs were too high, followed, by traditional media ads. "Brand publishing" or "content marketing" creative costs were actually lowest on the list of where marketers see a need to squeeze.

Perhaps surprisingly, data-driven areas such as search and programmatic have relatively high non-working costs. For programmatic, creative optimization, which simultaneously involves creating and testing multiple ads increases agency and production costs while potentially lowering the need for paid media costs, affecting the ratio, Mr. Bolman said. And on the buy side of programmatic, marketers are generating "non-working" agency costs in an effort to spend less on paid media, similarly increasing the "non-working" ratio.

Also somewhat surprisingly, "non-working" media ratios are actually higher for bigger ad spenders, even though they've got bigger media budgets to balance against the cost of creating ads. Those with budgets under $10 million spent 17% of advertising dollars and 37% of overall marketing dollars on non-working media. Marketers with budgets over $500 million spent 27% of advertising and 46% of overall marketing dollars on non-working media. (Marketing other than advertising in the study included internal staffing, events, technology, infrastructure and sampling, none of which was counted as "non-working," because it wasn't media.)

While the "non-working" issue has been a focus for some marketers, it clearly affects agencies and other marketing-services providers, as those marketers seek to reduce or control spending on their fees.

"Agencies get a lot of flack for being a function of cost or being inefficient or not being prepared for the modern landscape," Mr. Bolman said. "And I think in a lot of the media reviews or agency consolidation that we're seeing, the justification seems to be around their role in non-working spend. But our data doesn't really confirm that."

Based on looking at marketers who had lower "non-working" costs and were more satisfied with their spending levels, such issues as better briefing, planning and development processes separated them from others, Percolate found.

Asked to identify what was driving higher non-working media costs, marketers named "emergence of more expensive media formats," internal processes like briefing, planning and media evaluation, and employee talent costs ahead of agency costs.

Source: Percolate

Charts by Chen Wu