Existential Threats to Advertising Agencies
Published B&T – Sept 2016
Part 4: Remuneration:
This is the final article in the series on the major existential threats facing advertising agencies in the near to mid-term:
The vast majority of people working in the industry love what they do – something never to be taken for granted. Every research study conducted into the primary reason for people changing jobs is surprisingly not for money. It is for job satisfaction.
Another of the changes I have seen over 30 years is the drop in salaries across the board for every role in agencies. This is not unique to advertising, wages growth has been stagnant for some time. But compare 2016 to 1983 and all agency jobs pay far less in real terms than merely the wages stagnation we have witnessed since the GFC.
The simple reason is that advertising agencies are nowhere near as profitable as they once were. But agency remuneration structure, though highly rewarding at the time, had an inherent weakness that the digital world has glaringly exposed.
There used to be a saying Media Means Money – an agency was paid 10% commission on the media expenditure, which was limited to mainstream, a 7.5% service fee on top of that plus production (print and electronic) charges and in some cases head hours for jobs outside of creating and producing ads. Head hours was seen as a mug’s game, not particularly profitable and as a colleague once said “Only prostitutes and lawyers charge by the hour.”
Though the revenue stream was fabulous, we were in fact “giving away” the thinking and making money on commissions and the production.
Advertising agencies were originally “advertising agents” – as mentioned in the article on “Credibility”, advertising agents bought press space for as little as possible and sold it to clients for as much as possible. Essentially, they were retailers of press space, as opposed to providers of advice i.e. what is most beneficial for you (the client), as opposed to me (the vendor) was not how the system worked. Walk into any retailer today and ask “is this product any good”? I seriously doubt you will get the response “it is a piece of shit”. If a better option is recommended, even if it is the same price or cheaper than the original product enquired about, it will be because the margin is greater i.e. the benefit is always going to favour the retailer.
When creative was added to the service, the revenue came from the production and printing. But the really valuable stuff, the thinking, was literally given away for free.
In many ways, our industry still operates in a similar manner i.e. we give away the most valuable component of the overall service we provide and charge for superficial crap.
Rather than solve problems, our industry became trapped into a system where revenue was only generated if media was bought and ads were produced.
Yes, there has been a shift to fee based remuneration, but it is still biased towards making or booking something. For all the jokes made about lawyers, the bastards know how to bill – they bill in 6 minute increments. Yep, 10 to the hour and how they keep track of that is anyone guess. They have prostitutes covered there (both male and female). Even they wouldn’t have the gall to bill you for the time it takes to get undressed.
Lawyers also have the advantage of hundreds of bright young things all prepared to pretty much sell their souls to make equity partner. And to make equity partner, you firstly need a record of producing loads of billable hours. Very profitable having hundreds of minions, who you pay $2.50 an hour and charge out at $300 an hour. (Not quite $2.50, but the variance between what the bulk of associates are paid and the amount they are billed out for makes the 3 times head hours cost formula look like chump change.)
This approach is not only taken by lawyers. Accounting/advisory/management consulting firms all use a similar formula.
Apart from being a very profitable business model, their fee approach ensures they are seen as providers of advice and clients know (or should I say believe?) they are paying for objective advice – they are paying for an intangible, which is quite a coupe.
History always comes back to bite you on the bum in some way. We want to be seen as providers of advice and yet historically we have used commissions and “making something” as our primary form of billing. As an industry, we have never said “this is the idea and it will cost you $x. Of course to ensure the integrity of the idea from concept to finished product, we really need to produce it and that will be $y. But x should always be far greater than y.
In a digital world, with so many different forms or disciplines of communications/persuasion we have the opportunity to shift the billing model and charge for thinking. Ironic that an industry renowned for creativity doesn’t charge for it. Imagine artists giving away their paintings, only making money on marking up canvas, frames and paints, crayons etc.?
In essence, that is what the advertising industry has been doing for over 150 years. All of the fabulous ideas (both creative and media), essentially have been given away for free. And when something is free, you place very little value on it