With Procter & Gamble Co.'s worldwide move to performance-based compensation, a move many will soon follow, advertising agencies face a similar choice: stay in the advertising business or expand into the brand relationship business?
The impact of performance-based compensation is a watershed event, similar to 100 years ago when ad agencies expanded into doing creative work from being just media space agents.
The need for good creative and media buying will continue, of course. The change is that agencies also need to become experts in how brand relationships are built and managed. It's the quantity and quality of brand relationships that determine sales and profits.
This requires understanding and advising clients on all important brand messages, including those sent by such things as pricing, distribution, product performance and customer service. As we explain in our book "Driving Brand Value," most product and service messages (along with the unplanned messages such as news stories and word of mouth) have more impact on sales and profits than do marketing communications. Mass media advertising is only the tip of the brand-relationship building iceberg.
BRAND RELATIONSHIPS EXPERTS
Agencies, therefore, must become brand relationships experts for two simple reasons. The first is to ensure that all brand messages are positive, so advertising's impact on attitudes and behavior will not be negated. The second is to help clients manage the increasing level of two-way communication with customers as customers make more use of interactive technologies and demand more recognition and attention.
Agencies that fail to understand what performance-based compensation really means are in danger of once again being by-passed. That has already happened twice in recent years.
The first occasion was when clients turned to management consultants (rather than their agencies) for marketing and brand building help. This is because management consultants better understand brand equity (increasingly a major portion of shareholder value). This should never have happened because brand equity is an intangible based on perceptions that are communication driven, and agencies are supposedly communication experts.
Agencies were bypassed again when clients "discovered" that retaining current customers is more cost-effective than getting new ones. This time clients turned to direct-response agencies and information technology companies to help them improve internal and external communications, to be more personal in their communications and to learn how to better listen and respond to their customers. (This doesn't mean agencies should become high-tech companies, but they should be working side by side with these communication solution providers.)
In order for agencies to be more responsible for sales and profits, they must begin by doing the following:
* Better manage customer expectations.
Operationally, agencies must move from just making promises (e.g., making and placing ads) to managing expectations (e.g., managing brand relationships). When prospects' and customers' expectations are not met, they quit buying. Making promises gets customers. Managing expectations keeps customers.
* Understand the difference between advertising and brand communications.
Advertising is one-way communication: creating and sending messages. Brand communication includes not only creating and sending messages but also receiving and responding to customer messages. Agencies need to be more involved in post-sale communications because that is often what makes or breaks brand relationships. Instead of account planners, for example, agencies should have "relationship planners."
* Identify and monitor critical brand contacts.
The concept of brand contacts is not new. However, most agencies only think of one type: company-created brand contacts (e.g., marketing communications). From our consulting and research, we have identified two other types that have more impact than advertising, PR, etc.:
1) Intrinsic brand contacts, which are interactions with a brand in the course of buying and using a product. For example, on a plane trip, making the reservation, checking in at the airport and sitting on the plane are all intrinsic brand contacts. There is no way to travel by air without having these brand experiences.
2) Customer-created brand contacts, which occur when customers and prospects use 800-numbers and visits to Web sites for ordering and customer service. How a company facilitates these customer initiated contacts and responds can significantly weaken or strengthen brand relationships.
Although agencies cannot and should not be given responsibility for intrinsic and customer-created brand messages, they had better be aware of their impact, and advise clients how to make them as positive as possible.
* Help clients plan for the back end of interactivity.
Agencies are increasingly helping clients set up interactive Web sites (which, by their very nature, are promises of two-way communication). Setting up a Web site, however, should be just the beginning of helping a client communicate online. Agencies must help clients budget for and design the back end. What happens after a customer asks a question or complains? What interactions and feedback are captured? How can the customer database be used for better developing strategies for targeting, retaining and growing customers? As an interactivity study recently reported in this magazine (Forum, May 24), the majority of companies do a poor job responding to customer-created contacts.
* Understand and teach brand relationship metrics.
Agencies should help clients measure customer perceptions of trust, responsiveness, likability and all the other constructs of brand relationships. They should also should help determine such things as lifetime customer value, which is a bottom line measure of brand relationships. With scanner data and automated customer service centers, these can now be done relatively easy.
* Be function as well as media neutral.
There's a lot of talk about agencies becoming media neutral. So what's new? Most major advertising campaigns have always used a variety of media. What is critical-and, for many agencies, culturally unthinkable-is to be marketing communications neutral.
Different functions-PR, sales promotion, direct response, sponsorship, as well as mass media advertising-can do certain things that impact customer behavior more cost-effectively than the others. Agencies must advise when it is best to spend ad dollars in other marketing communication areas. Agencies in Omnicom Group, WPP Group, Interpublic Group of Cos. and other networks need to have a shared compensation plan so family agencies don't continue to compete against each other when working for the same client.
* Find best practices and package them.
To round out their brand relationship expertise, agencies need to do what management consultants do-learn from their clients, package and hone these observed best practices, then offer added value to all their clients by working closer to the sales function (e.g,. managing brand relationships).
The bottom line of performance-based compensation is that agencies must realize that non-advertising messages can negate the most brilliant creative work, and that building brand relationships means that listening and responding to customers is just as important (or more so) than creating and placing ads.
A CULTURAL SHIFT
Agencies that make the cultural shift and expand into managing brand relationships will once again play a key role in the business of their clients.
Examples of agencies that have done this are Price-McNabb, Charlotte, N.C.; Phelps Group, Santa Monica, Calif.; and Cramer-Krasselt, Milwaukee. Forty percent of Price-McNabb's revenue now comes from total brand communication consulting and strategic planning. Phelps, which uses a totally integrated communication approach in helping clients manage their brand relationships, has had an average annual growth of 26% over the last 12 years. Cramer-Krasselt's attention to total brand communication has resulted in its revenue quadrupling in the last 10 years.
Mr. Duncan and Ms. Moriarty, authors of "Driving Brand Value," are brand and integrated marketing consultants. They co-founded the Integrated Marketing Communications graduate program at the University of Colorado-Boulder, where