Why can’t ad agencies make money?

Everyone reading Ad Age probably agrees the role of marketing is to drive revenue—or, if you’d rather not sound like you went to business school, to grow the business and make money. Attract new customers, inspire repeat purchase, drive advocacy, build market share and make the cash register ring. Sounds like a good investment, doesn’t it? So why are marketing budgets getting sliced like ginger at a sushi restaurant, and why do agency margins remain as thin as a Gucci model on a keto diet? The board game Monopoly taught us that bankers never wind up on the downside of the dollar because they are in the business of managing money—not only yours but theirs—and they always take care of their own. Maybe it’s time marketers took better care of each other. That begins when agencies help clients make the case to keep marketing budgets funded by their management, and, in return, when clients pay agencies what they are really worth. That is the great irony of marketing—the same people who are experts in driving revenue have no clue how to monetize their own existence. We are an industry awash in irony, a bunch of cobblers with holes in our shoes. Agency models are broken, clients are risk-averse and nobody seems to know how to make a financial case for marketing to withstand the scrutiny of CFOs hell-bent on cutting costs. Remember that old trope about knowing that half your advertising budget is wasted, only you don’t know which half? That may have been true half a century ago, but with all the hullabaloo over data you’d think someone could correlate sales to marketing. Ad Age Creativity Bookmark our section covering the best in brand creativity every day Read more here Clients could study the hundreds of Effie- and WARC-winning case studies from the last two decades which prove that every dollar you spend on running an effective campaign delivers much more than a dollar in return. Why else would brands with nearly 100% unaided awareness such as McDonald’s or Nike keep advertising? Because marketing works. Humans are forgetful, impulsive and easily distracted, so if you don’t invest in their attention then you won’t gain their interest or persuade them to give you their time, money and loyalty. At its most basic, marketing is the Hello, Please and Thank you of any civilized human encounter, and at its best, marketing is the language of love between a company and its customers. To all the CFOs out there, try this at home: Stop saying Hi, Thanks and I love you, and see how things go in your relationship. Then ask yourself if the return on your investment of attention, courtesy and affection were an unnecessary expense or an essential part of your daily life. Somehow common sense got lost on the way to the budget meeting. Everyone knows the upper funnel drives the lower funnel, but measuring the top is never easy, so before your marketing cake is even out of the oven, the brand icing gets cut from the recipe. Nobody likes a cake without icing. (And since marketers don’t drink as much as we did in the Mad Men days, sugar is all we have left.) Let’s get serious about alternate ways to get paid, try to figure out what fair looks like and identify all the ways in which the financial health of both clients and agencies are inextricably linked. Agencies should invest in their own data and analytics to help clients correlate soft metrics like brand likability to hard outcomes like sales and market share. Clients should experiment with variations on their media mix in the real world, a range of brand-versus-promotion scenarios to see which formula optimizes growth market-by-market. That kind of real-time intelligence will not come from pre-testing—the nemesis to creativity—because truly actionable insights are a combination of common sense and in-market observations. Trust your gut and open your eyes. For agencies, the post–holding company business model has always been a leaky bucket. Rather than act—and charge—like the creative consultants they are, agencies fall into the client-service trap of charging for billable hours. Why did no one ever realize that charging for hours is a backwards incentive that hurts both agencies and clients? An agency that puts more senior (expensive) talent on a problem and cracks it quickly is disincentivized from working faster and smarter. From a financial point of view, far better to fire your senior talent to lower overhead than have junior talent take longer to solve a problem by adding more research, process, meetings and PowerPoint to every stage of campaign development to extend the scope and squeeze more hourly dollars from unsuspecting clients. Pretty soon the agency looks like a funhouse mirror image of its clients, rather than what it was meant to be—an island of misfit toys where magic happens. Agencies can do two things to right the ship before we all drown. The first is to stop keeping timesheets. Instead, charge your client a set percentage of their overall budget, say 10%, and call it fees for creative consulting services. How you work is up to you, the modern equivalent of charging media commission, which worked fantastically well for decades as 15% of media spend. It’s no coincidence that during those years agency-client relationships lasted decades, not months, everyone made more money on both sides of the fence and campaigns were consistently stronger creatively. The second critical move is to own your intellectual property. If an agency develops a campaign, design system or tagline, they own it, period, and a client pays for its usage. If a client moves their business to another agency, they pay a royalty on the use of any IP carried forward. This is the Hollywood model, yet for some reason advertising agencies lack the confidence to go there. You think James Cameron doesn’t get paid every time someone makes another “Terminator” movie, with or without him? You bet he does. Unless we’re all—clients and agencies alike—healthy financially, the marketing industry as a whole will continue to struggle. We all know marketing is an investment and not an expense, just as we know a killer brand idea can change the fortune of an entire company. That kind of creativity should be worth a lot more than it costs today. Let’s see if adding value to both sides of the equation makes the math work for a change. What have we got to lose? From where I sit, that sounds like a lot more fun than begging for change. Sign up for Ad Age newsletters From influencer marketing to agencies, get the latest news and analysis delivered to your inbox Click here

Why can’t ad agencies make money?

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