Putting a Price on Digital Production

Costs Are Rising, but Without a Method of Standardization, How Does the Industry Determine Pay?

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This was excerpted from the September issue of Creativity.
Ever since the first friend-of-a-friend proposed that the first web developer build him a site (for no money), the effort and cost associated with digitally driven creativity has been a misunderstood and, sometimes, thorny issue. Unlike TV-commercial production, where there are some established cost parameters and you can typically see the budget on the screen, it's tough to price innovative web work.

Get a Mac
Happiness Factory

One price does not fit all: Both of these ads has a different level of complexity, and thus a different cost of production.

Though comfortably out of the "Bro, can you make me a website?" phase, digital-production pricing has yet to be standardized to the point where many have a good understanding of what things cost. Conventional wisdom says prices for interactive work are rising, but what's informing the increases and how does the industry determine where costs should be?

Digital-production leaders often tell the we-did-it-cheap-back-then story. "I worked on Volkswagen from 1999 to 2004 for Tribal DDB," said Dave Bedwood, a creative partner at Lean Mean Fighting Machine, Cannes' cyber Agency of the Year. "They were spending a million pounds on production on the floor above for the TV ad, whilst me and my partner were shooting videos ourselves on digital cameras."

Those days are quickly fading into history. The Interactive Advertising Bureau says internet advertising revenue is up 18.2% from the first quarter of 2007 to $5.8 billion. But what, if anything, does this mean to the relative outlay for the making of digital work?

Complexity price
It bears stating that interactive production does not lend itself to generalizations. "The same way you can't compare the costs of a Sony 'Bravia' or a 'Happiness Factory' with a 'Mac vs. PC,' you can't compare the investment needed in a 'Get the Glass' with an 'Elf Yourself,'" said PJ Pereira, founder and creative director at Pereira & O'Dell. "And that has nothing to do with the quality of the idea or even the return it will bring, just the complexity it takes to produce it."

But while prices vary with the nature and scope of the work, digital projects generally have larger budgets now, and with them comes a greater demand for expertise. For Lean Mean's "Nonstop Fernando" site for Emirates, Mr. Bedwood said the team "actually did a proper casting, found a proper actor and had a real TV production company and director film and produce it."
Read more about the creative process in Ad Age sibling Creativity. This was excerpted from a piece in the September issue by Associate Editor Nick Parish.
So, according to Mr. Bedwood, audience expectations rise, budgets rise, the level of craftsmanship involved goes up and, eventually, you have equality between the online and off.

But there are no ready standards for these newly significant budgets. Unfortunately, a lack of media buy is often equated with a lack of production money. The loose 10% to 15% standard, where that percentage of the media spend is put into production, is disregarded. "Clients still have trouble understanding interactive can be just as expensive as executing a TV spot, just without having the media spend," said Paul Collins, interactive creative director at Swedish agency Ã…kestam Holst.

Rick Webb, chief operating officer of the Barbarian Group, said he thinks the lack of a media buy on the bulk of digital production work makes it difficult for agencies to justify their costs. "[Agencies] have a strong incentive to maintain opacity here and mark up the digital production," Mr. Webb said. "One other factor that is unfortunate for marketers' best interests is that the bulk of their 10% to 20% increase in interactive spend per year is controlled by their media company, who have no interest whatsoever in increasing digital-production budgets. They just funnel it to [digital-services providers] and get better buying power, perks and more markup profits."

There are ways to channel needed funds into production, according to Bob Mackintosh, interactive director at Syndey agency Host. "We seem to be able to snaffle more production dollars from a media budget when the idea is positioned as a 'media idea,'" he said. "Some viral content comes into this category."

Frequently, budgeting is a straightforward matter, based on an initial eyeballing of the brief.

Unmapped territories
"Often, based on experience, we say, 'Yeah, that's about an X-dollar job,'" Mr. Mackintosh said. "Once we have a proper idea of the concept, we scope it out, work with all people involved and work up a solid estimate from there." But another major factor in the variation in online pricing is innovation. "With every campaign we're trying to do something new," Mr. Mackintosh said. "This makes it hard to scope as there's often no benchmark."

"You pay a high price for being the first to do something," said Alessandra Lariu, who recently arrived at McCann, New York, as digital group creative director. Like traditional production companies, which will often work to a net financial loss on jobs they know will carry awards weight, some digital companies are willing to take a flyer on truly innovative projects. "The money comes back in later on as a result of the PR awards generate," Ms. Lariu said.

Agencies have to be careful, though, of dangling projects in front of production companies and then playing the innovation card as leverage against a tiny budget. One agency head of interactive production said some agencies "burn through vendors" using just these tactics. "The competition for quality creative is fierce," Mr. Webb said. "Finding the next 'wow' factor is vital."

With marketers mandating agencies to justify costs, Mr. Webb said the result is a heated pitch process for interactive shops. "It's not uncommon to be in a five- or six-way pitch with other SoDA-type agencies," he said. (SoDA is the Society of Digital Agencies, established earlier this year to foster best practices in this space.) "And you might be the greatest thing in the world, but 90% of your chance of winning that pitch is still going to be your price."

Among the agency producers assigning the work and bringing together production partners, there's a strong sense of which company will come in at what number. Several of the interactive executive-producers we spoke to at large agencies had fundamental ideas about what different shops would charge for specific pieces of work. Watch out, they cautioned, because if you aren't sure going in what things should cost, you're likely to overpay.

As with nearly everything, there's room for negotiation, and top production companies can afford to be more selective. "The top dogs can pick their projects and be tough in their negotiations, knowing there's a line of agencies waiting to get in," said Anders Gustafsson, senior creative at Sweden's Daddy. "As traditional agencies get better at digital, this will change."

And newer, faster and younger companies will always be arriving. But aside from having to constantly worry about being underbid on projects by garage shops, Mr. Webb said there are some cost advantages to being a well-known shop. "Our costs per hour of average employees in certain roles have actually gone down in the last few years. If you have a boring place to work, you have to pay a lot to keep people there, so perversely a lot of the middling work is actually more expensive to produce than the awesome work," Mr. Webb said.

Standards, a word on the lips of anyone who's been on the wrong end of a bad deal , seem to be slowly developing among the production community, at least in an informal sense. Mr. Webb said he doesn't think formal standards are necessary, but terms of engagement are, such as those offered to traditional production companies through the Association of Independent Commercial Producers. "[There should be] clarity on work for hire and attribution, and award shows and staff poaching," Mr. Webb said.

According to Mr. Gustafsson, the standards discussion in his native country is bringing together myriad operators under the banner of the Swedish Advertising Association's Digital Group. "The need for it varies, since we've got traditional agencies with digital competence (such as Forsman & Bodenfors and DDB, Stockholm), creative digital agencies with their own clients (such as Daddy and Farfar) and digital production companies (Perfect Fools, North Kingdom) within the association. I think we'll see some sort of recommended agreement template for digital productions shortly, similar to the ones recommended by the association in traditional media today." Six months into its formal association, SoDA doesn't have standards or pricing guidelines on its immediate agenda, according to Chairman Richard Lent, CEO of AgencyNet. Mr. Lent's shop builds its own pricing models based on a logging widget employees engage when they're working.

Where will all this lead? Well, it's probably safe to say basic economic principles will continue to guide what things cost in the digital space until, of course, an AICP-like body begins to look seriously at setting guidelines around contentious areas.

Looking forward, it's conceivable on- and off-line production may reach parity. "At some point, the investment that you need to make to have A-Class digital stars such as the Barbarian Group or North Kingdom will get close to what you can pay to a director like Spike Jonze," Mr. Pereira said. "I wonder if that will mean that one day we will see people like (A-list Flash artist) Erik Natzke working directly with Michel Gondry to produce cross- media content. If the prices continue to rise, this day may be about to arrive."
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