With price becoming such a driver in the selection of a new agency we have noticed that there is a strategy, used by some media agencies, to effectively poison the waterhole of the client / agency relationship by proposing a unsustainably low fee as a way to either secure the account or make sure the actual winner is left with a gaping hole in their fee.
The problem is that sustainability appears to rarely be a consideration in the selection of a media agency in a tender process. Sure capability, chemistry and of course cost, but there appears no measure of sustainability. What I mean is answering the question “How many agency staff and of what expertise, experience and mix are required to invest the level and mix of media?”
While this is a complex question, it is actually possible to very accurately calculate the level of resourcing when you take in to consideration the variables of the specific requirements of the media agency. TrinityP3 has been doing this work for more than a decade and now by combining our data with the ScopeMetricTM methodology pioneered by Michael Farmer, we are able to provide a detailed and accurate way of either calculating or measuring the answer to this question for advertisers taking their media account to market or questioning the performance of their current media agency arrangements.
But first let’s look at how agencies can poison the waterhole in a pitch.
Slashing prices to unsustainable levels
Why would an agency do this? Often it is the incumbent who is facing the threat of losing an existing client in a pitch. The options, with the odds stacked against them, are to try and buy the business or make sure that if unsuccessful, the other agencies will be forced to match the offer and leave them in an unsustainable position.
Of course it is not always the incumbent. After all, for the incumbent to significantly reduce their existing fee is potentially suspicious.
We have seen all sorts of strategies to present a significantly discounted fee. These include:
- Offering an agency resource plan at direct salary costs only, with no overhead or profit margin. This has the advantage of significantly reducing the average cost per FTE. Sometimes the agency will add a profit margin, which they will put at risk based on performance, just to distract everyone from the fact the agency is forgoing their overhead costs.
- Offering an agency resource plan with a significant number of senior (and most expensive) resources free of charge. This is often very attractive, as it appears to offer the more expensive and desirable agency resources at no cost. The question is if these resources are ever actually delivered.
- Simply reducing the agency resources significantly on the basis that the agency is more efficient in delivering the work. This is rarely a strategy used by the incumbent. But challenger agencies will often under play the resourcing hoping that once appointed they can argue for an increase to solve under-servicing issues.
All three strategies mean that if the agency is successful in effectively buying the business then to make the arrangement sustainable they will need to find either significant cost reductions or find alternative sources of revenue.
But if they are unsuccessful and the successful agency is required to lower their fee in the negotiation to closer match the low-ball fee, then they will need to find either significant cost reductions or also find alternative sources of revenue.
The prevalence of the effective media commission
Of course we are talking about agency resources as the justification of the agency fee. But often we have seen both marketers and procurement teams revert to an ‘effective media commission’ as a way of assessing the suitable agency fee.
When the proposed media agency fee is compared to the total media spend you get an effective media commission. A $100 million media spend with an agency fee of $4 million is a 4% effective commission (Technically a 3.85% commission). But if the agency fee is reduced by a third to $3 million then the effective media commission is just 3% (Again technically a 2.9% commission). Clearly a much more cost effective solution and after all it is just 1% less at a lazy million-dollar reduction in agency fees.
Then when the agency is appointed it is simply a process of the agency then working out how many resources of what sort of mix and capability the fee can effectively employ but hopefully still maintain a workable margin. Increasingly it is this last point, a workable margin that is the first to suffer when one of the participating agencies decides to ridiculously cut their fee.
The fact is that while technology has increased the efficiency and productivity within the media agency, the level of productivity gains that make the agency 30% or 40% more productive to deliver that 1% effective commission reduction. At the same time any productivity improvement is being countered by the increased complexity involved in the majority of advertiser media needs.
Increased diversity in media channels available and an increased requirement for data integration in the selection and performance of these channels is driving resource requirements, including a skyrocketing number of media reports that go beyond a simple data dump and require a significant number of resource hours to deliver.
Focusing on the requirements and not the cost
The problem is the focus of each of these different assessments of media agency fee is cost alone. Be it the discount offered by the media agency wanting to poison the watering hole, or the advertiser and procurement team accepting the ridiculously low-ball fee based on a cost assessment such as effective media commission. None of these are either based on the value or look at the sustainability of the fee to allow the media agency to deliver the work required.
It is no wonder we have seen advertisers go from agency to agency at the end of successive contract periods chasing lower costs and ending up with under-performing media investments (assuming they are measuring media performance).
Yes the process of measuring the agency resource requirements is a complex one, but the cost of not doing it is high. Take the example above with a $100 million media investment. If you saved one million dollars in agency fees and this meant that the agency was unable to properly resource you with the resources and capabilities to ensure your media investment is performing to an optimal level, how much are you putting at risk to achieve that saving?
Calculating sustainable agency resources
To answer the question “How many agency staff and of what expertise, experience and mix are required to invest the level and mix of media?” you need to consider all of the variables. We have mapped out those variables here in a White Paper titled “Measuring Media Agency Workloads The Media ScopeMetric® Unit”.
It is a methodology that allows marketers, advertisers, procurement and agencies to be able to calculate and measure the requirements of the media investment, taking into consideration the complexities involved and providing a quantifiable and empirical measure for the agency resources unique to those requirements.
When we are talking about the investment of millions, or tens and hundreds of millions of dollars in marketing and media investment doesn’t it make sense to mitigate the risk of unsustainable and under-performing media agency arrangements but getting the level of resourcing right for your media strategy?
TrinityP3 has developed a suite of products aimed at increasing your marketing performance to achieve improved business outcomes.