Ignorance of Pricing is Ruining Ad Agencies

Let39s keep it simple amp160Creative agencies do not sell Big Ideas creativity Cannes awardwins or brand building any more than General Motors sells transportation Apple sells communications or Bain sells analytics amp160Creative agencies sell ads or more broadly content in the form of deliverables Bundled with the deliverables are strategic insights of course just as iPhones are bundled with high value functionalities amp160Agencies are in the deliverables business amp160The business is expected to deliver results amp160Prices should be high enough to reflect anticipated results amp160The number of deliverables is high and growing amp160Price is income divided by deliverables amp160Price per deliverable with deliverables normalized by size is the relevant pricing metricResearch for my bookamp160Madison Avenue Manslaughteramp160shows that deliverables have been growing and fees have been falling for decades Consequently price has fallen dramatically and there is nothing in management39s toolbox to manage or stop itamp160 Price in constant dollars is now 70 below what it was in 1992 amp160Since 2004 which was the last year that price and deliverables were in balance price has fallen by 42 and has been below the level required for appropriate agency staffing amp160Falling prices stretch agency resources reduce quality create client dissatisfaction and limit holding company growth amp160Agency CEOs are on the hook for this adverse performance amp160They39ve responded wrongly by focusing on cost reductions downsizing since 2004 cutting out creative analytical and senior muscle instead of seeking better and more logical prices for their growing deliverable workloads amp160Worse they blame procurement for their predicamentSource Farmer ampamp Company client dataPrice is calculated 39per ScopeMetricamp174 Unit SMU39 our normalized unit of agency workAgencies confuse quothow they are paidquot with quotwhat they are sellingquot amp160Just because agency costs are the basis for calculating fees does not mean that agencies are selling costs or that clients are buying manhours amp160A hot dog seller in Yankee Stadium could calculate prices on daily attendance 200 on quotlow capacity daysquot below 30000 fans 300 on quotaverage capacity daysquot 3000035000 fans and 400 on quothigh capacity daysquot above 35000 fans just like the airlines amp160The vendor is still selling hot dogs whatever the price not the day39s attendance level Get 39em while they39re hotAgencies act as if they have no control over income amp160They39ve abdicated pricing to their clients who determine what the agency costs are through benchmarking what the fee levels will be through zerobased budgeting and what the Scopes of Work will involve more work than last yearAgencies do not systematically use Scope of Work deliverables to establish their prices and calculate their fees even though deliverables are the foundation of what they sell amp160Deliverables are not documented tracked or negotiated in a consistent way amp160This is crazy because deliverables are growing and remuneration based on deliverables could grow rather than declineThere is a gap between how much agencies are being paid and how much work they are doing amp160How big is the gap amp160It is now about 24 I estimate amp160This gap could be viewed as quotunrealized incomequot for agencies and their holding company owners or as 24 too much work with agency staffs stretched to carry it outIf half of this surplus work is unnecessary for the brands and can be cut out then the agency fee gap is 12 or so amp160still a very considerable amount amp160The fee gap represents quotagency underperformancequot from an income and profitability standpointAgencies are not realizing all the income that they couldAgencies need to take control of pricing amp160First they need to acknowledge that they have a price problem not a cost problem Since they do not measure their deliverables or work though they cannot measure price so this is a separate problem that needs to be solved amp160Second they need to recognize that future pricing must be handled on a perdeliverable basis amp160Third they need to ensure that the work they plan and carry out adds value enhancing client brand growth and profitability amp160Otherwise their efforts to improve pricing will fail since they will remain in a commodity business competing against other commoditylike agenciesAgency CEOs need to take control of pricing as their most important strategic priority amp160What could be more critical for the longterm success of their clients their employees and their ownersCartoon credit Leo Cullum The New Yorker The Cartoon Bank With permissionClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc 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Ignorance of Pricing is Ruining Ad Agencies

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Michael Farmer

Powerful New PSAs Showcase the Mutual Rewards and Unconditional Love of Adoption from Foster Care - Ad Council InSites

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Ignorance of Pricing is Ruining Ad Agencies

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