How to measure the cost of switching advertising agencies
May 29, 2012
This is a guest post by Dan Hestbaek - Co-founder and CEO of Hestbæk Consult, the leading Marketing Management Consultancy in the Nordic region.
Prior to an agency search process, many clients often ask us: “What is the cost of switching our agency?”
To which the answer is complex and never the same, as the level of involvement with agencies as well as the industry, in which you are operating in, is a decisive factor when determining switching costs.
To provide the audience with knowledge in this field, our second viewpoint is based on this topic, ultimately illuminating challenges for both clients and agencies. Our knowledge is primarily based on experience from various agency searches, in which considerations to agency switching costs are highly important.
What are agency switching costs?
When considering replacing your agency, the role of switching costs becomes relevant. We categorize these switching costs as the money, time and effort used in building a new relationship, as well as the costs of exiting a relationship. Clients incur set-up costs and exit costs respectively.
Set-up costs in advertising occur because clients need to guide and direct their agency representatives to ensure that agency knowledge, skills and expertise are transformed into client value. Exit costs are apparent when that value is lost by later switching agency. The exit cost can be lost opportunities with the former agency or a potential leak of proprietary client knowledge involving sensitive commercial data of value for competitors.
Some of the most evident switching costs that we highlight when consulting clients, are listed below:
1. Costs associated with ending an agency relationship:
- Breach of contract that could lead to agency compensation
- Sunk costs such as lost opportunities with the existing agency
- Threat of proprietary client knowledge being transferred to potential competitors
2. Costs associated with finding a new agency:
- External: Search Consultants running the agency search process
- Internal: Client resources used in the agency search process
3. Costs associated with entering a new agency relationship:
- Learning costs in relation to providing knowledge about the company, products and values
- Streamlining processes both ways running
- Costs associated with accepting uncertainty in regards to outcome from the new agency
- The emotional and psychological costs involved in building a relationship and gaining trust
It should be noted that the industry in which one is operating also plays a significant role in connection to measuring switching costs. As for instance industries that require a high degree of technical product knowledge, often seen in durables, has higher switching cost associated with changing agency. This ultimately means that agencies operating with these types of clients often enjoy longer relationships.
When looking into some of the aforementioned switching costs, the level of commitment between client and agency becomes important to analyze, as this level will determine how high the cost of replacing an agency will be. It can therefore be helpful to determine where in a relationship life cycle the relationship between agency and client is placed.
The time spent on building the relationship will indicate whether the relationship is in the initial phase, the transitional phase or if it has moved to a mature stage, in which the switching costs are the most expensive.
Below, the relationship cycle between agency and client is illustrated.
When is the optimum time to switch agency from a cost perspective?
What we have experienced is that replacing an agency due to challenges, which may seem critical, is not always the right solution for clients, at least from an economical perspective. Complications between client and agency can sometimes be solved by conducting formal periodic evaluations of the relationship combined with informal evaluations, workshops and social events when relevant. This can create improved trust and understanding both ways and illuminate challenging areas of the relationship.
If efforts made to improve the relationship do not work or if the desired competencies are not present at the agency, the timing for changing your agency can affect the switching costs to be lower.
High switching costs are often connected to relationships that are at the initial phase, in which a lot of investment has been made to set up the new collaboration. However, the level of trust between both parties is still low and the switching costs are therefore not at the highest level. The highest switching costs occur at the mature relationship level. At this level a lot of relationship investment is made, formal evaluations are used to track and improve conflicts and the agency is often considered to be a strategic partner. All of which creates a solid client agency relationship, thus indicating the highest switching cost.
Between these two stages as mentioned above (initial and mature) is the transitional stage, in which the switching costs are the lowest. At this stage the high set up costs from the initial stage have decreased, the trust is growing, however not at the level of full trust. This is illustrated in the curve below, indicating total switching costs.
The model illustrates where costs are highest and lowest, which could ultimately be helpful in determining when to replace an agency from a cost perspective, aiming at switching agency when the curve of total switching costs is at its lowest.
Measuring switching costs
Measuring the costs associated with switching an agency is a comprehensive task, which requires a clear understanding and intelligence on the resources, used on the agency. This is in regards to briefings, workshops, evaluations etc., which can somehow be measured with the time spent and the money used on these activities.
However, it is more difficult to measure the intangible costs such as emotional and psychological elements. Moreover, these elements vary from each individual and can be looked at as crucial and priceless for some individuals, while others may not rank trust and emotions very high.
Nonetheless, many costs that may not seem that evident occur when replacing an agency, thus it becomes crucial that one does not make an adverse selection. Adverse selection means choosing a wrong agency for the task, which could be caused by agencies overstating their talent or over-promising their deliverables. This scenario could lead to an expensive initial phase with extra high startup costs and a possibility of an early break up.
To minimize the initial switching costs we strongly believe that money and time could be saved in the agency search phase by conducting a structured and insights driven agency search process; handled either internally or externally by agency search consultants.
When considering changing your agency make sure that the following points are taken into consideration, in order to ensure the lowest switching cost:
How is your existing contractual setup with your agency?
Look into the contract and understand which economic losses might occur by replacing the agency. Furthermore, ensure legal agreement on proprietary knowledge is handled prior to handing in your notice to the agency
Have you have considered your resources for conducting an agency search process both internally and externally?
Finding a new agency requires time, money and knowhow, you should therefore make sure you possess the right competences and experience about the dynamic agency landscape and that you hold the internal resources to run the process. If not – hire an agency search consultant
Our experience tells us: Your current agency relationship can often be saved by formal two-way evaluations ensuring clear understanding of the current state of the relationship
When conducting formal client agency evaluations make sure to structure follow-up action points that can be measured upon – both on client side and agency side.
What are your experiences with agency switching and the costs attached? Leave a comment with your thoughts.
Global Marketing Insights: Putting the customer experience first
May 27, 2012
I recently attended the Contagious Magazine presentation in NYC on Frictionless Commerce as part of the ANA WFA Global Marketing Conference. The session was held at the Google Creative Labs down in the Meatpacking District and was attended by more than 60 Global marketers.
The section on Frictionless Commerce started with a video produced by Google on what most online shopping experience would be like if they occurred in the real world.
While it works brilliantly for this example, it is a worthy and timely reminder of what happens when we put strategy, concepts and executions ahead of the customer experience.
Ultimately engagement is about the customer, be that shopping, customer advice and service, social media, or advertising.
The customer is first. Except when they are not.
I also like the fact that by taking what is “virtual” and putting in a “real” context you get insights into the assumptions or oversights that often occur. For example, marketers using social media as another sales channel, would be like entering a conversation and immediately going into a “sales pitch” without understanding what the participants are talking about or even if they are vaguely interested in what you are selling.
Or even worse in many ways, where marketers join or initiate a conversation with customers and then just “disappear” because the “campaign” has finished, leaving the other participants wondering what happened.
What other examples do you know of where marketers have engaged in social or interactive marketing in a way which would just not cut it for customers in the real world? Why not share some examples here?
Because people do not differentiate between online and offline.
Vestas’ CMO Morten Albaek urges Marketing Leaders to take a “Transparency Pledge”
May 24, 2012
On May 10 in New York, I attended The Internationalist 100 to celebrate the announcement of the annual list of 100 Marketing Leaders.
The event, “Brand Growth in a Socially Transparent World,” had some excellent speakers including:
- My old colleague Paul Price, CEO, Creative Realities,
- Elliot Polak, CEO, Textappeal,
- Jim Gregory, CEO, Coreband and
- Morten Albaek, CMO, Vestas Wind System
who closed with a rallying cry for new marketing action.
Photograph from Internationalist 100 by Philip Kessler Photography http://www.philipkesslerphotography.com/
Denmark based Morten Albaek, one of this year’s 100 Marketing Leaders, raised issues of marketing trust and a new generation of citizens and consumers, in an address entitled “Redefining Transparency.”
He said “The fact of the matter is that consumers don’t trust marketing. Advertisers regularly poll as the least trustworthy professionals, scraping the bottom alongside politicians and civil servants”.
Morten Albaek, who is also an Honorary Professor in Philosophy, is known as an innovative global marketing thinker
To embrace this powerful shift towards transparency in marketing thinking, Morten Albaek suggested the following Transparency Pledge:
I will as a CMO:
- Acknowledge that I have a moral obligation and professional duty to create a more honest global marketing environment
- Never over-sell products nor declare them to be something they are not to gain business advantage
- Encourage my gifted employees to at all times be true about the product and corporation they are marketing
- Evaluate marketing not just strictly on ROI, but with metrics that measure the credibility and fact-based content of my marketing
- Always stand firm on the principles of the CMO Transparency Pledge in any dialogue, discussion or decision making process with my superiors
He concluded with a challenge to marketers every where, “So over to you my fellow colleagues; challenge the pledge, tweak it, or sign up to it. The CMO role comes with the power to change society for the better. Let’s join forces to make use of it. And since we all know strength comes in numbers, let’s do something we’ve never done – at least as marketers — and come together as a group defined by shared ethics. United, we can solve these challenges and win back both the trust of the citizumers and our self-esteem.”
So what do you think of Morten’s CMO pledge? Can you sign it? Would you sign it? Let me know as the Internationalist is planning to put the Pledge online for marketers to pledge their commitment.
ABOUT THE INTERNATIONALIST 100
Each year, The Internationalist names 100 Marketing Leaders to acknowledge those industry executives who are consistently moving our business forward and are the champions of insuring that brands can cross borders with relevance and responsibility. The Internationalist’s 100 series of think tanks and summits focus on Reinventing Marketing Leadership amid Global Complexity. These thought leadership events offer ideas to meet the increased responsibilities of 21st century marketing leaders in a more accountable, real-time world. The gatherings enable marketers to connect, share challenges and listen to fresh perspectives in the right-sized setting among peers.
A simple test for your strategic marketing and business initiatives
May 22, 2012
This is a guest post by Shawn Callahan – Founder of Anecdote, a management consulting firm that uses its expertise in story to inspire enduring change.
Richard Rummelt, in Good Strategy / Bad Strategy, opened my eyes to a simple test to help you see if you have effective strategic initiatives.
But before I describe the test here’s some context.
Crafting a strategy involves choosing a course of action to achieve desired outcomes over a set time period. An effective strategy makes real choices between competing approaches–as well as providing space for new possibilities to emerge.
I like to call this test of considering the opposite the Costanza gambit after the Seinfeld character who successfully employs the opposite as his new strategy for life.
For example a company might want to increase its market share. It might do this by increasing sales, buying competitors, expanding its geographic market or a myriad of other approaches. The strategic craft is to decide which approach to choose or combine and apply.
There are always more than one way to achieve your desired outcomes and your strategy should describe the choices your company has made. A good choice is usually a well considered and often tough choice.
What you will often see, however, in most strategic plans, are initiatives that don’t reflect a real choice.
Here are a few examples:
- We will provide great customer service – was there really a choice to provide poor customer service?
- We will delight our clients – had we considered underwhelming them?
- Empower our employees – not many companies succeed disempowering their employees no matter how many try
What are often portrayed as strategic initiatives are really the outcomes we are hoping to achieve. They don’t reflect what we’ve decided to do and therefore don’t provide an effective strategy.
So, the test is simply this: take a strategic initiative and consider the opposite. If the opposite is a nonsense then reconsider your strategic initiative and make a real choice. If, on the other hand, the opposite is a viable possibility then a real choice has been made, in which case employees will want to know why and that’s where a strategic story is important.
I like to call this test of considering the opposite the Costanza gambit after the Seinfeld character who successfully employs the opposite as his new strategy for life. Check out this 3 minute clip of the show where George Costanza has his epiphany.
The strategic opportunities of applying the Cynefin Framework to Marketing and Advertising
May 20, 2012
One of the areas he focuses on is using story telling and listening as a way to drive strategic and cultural change within organisations and they are very successful with projects for companies all around the world.
We have spoken extensively on our Sunday walks about the idea of storytelling in advertising, but in the context of the Cynefin Framework, explained beautifully here by Shawn, storytelling has a much larger role and implication for marketers in strategic development in this transparent and connected world.
The distinction of simple, complicated, complex and chaotic provides an excellent framework for solving strategic marketing problems.
Too often marketing strategy is developed in the simple and complicated. When in actual fact marketing and advertising, as any marketing professional knows actually exist in the complex (and some may cynically say the chaotic).
What do I mean? Well how often have these happened to you:
- Concept testing shows a communication piece has high scores and engagement only to deliver poor results
- Past successful campaign strategies show unpredictable or highly variable results when repeated
- Data analytics indicates potential market share values which appear achievable but are rarely realised
It is because we live and operate in complex systems such as markets, segments and categories where identifying a direct cause = effect is almost impossible and yet most of the processes we use to inform, or at worst make, these decisions are based on simple and at best complicated systems.
Rather than relying on defined and determinable cause = effect, complexity relies on test and learn methodologies where you had a stimulus or change to the system and look for desirable and non-desirable changes against predicted outcomes.
It has the ability to completely change the way marketers think and engage with the market. It also provides tools to work with the complexity of the market.
In what areas can you see the Cynefin Framework could help you in your marketing strategies? Lets discuss here by leaving a comment.