What’s all this bull about agency billings? – A misleading measure of agency performance
February 2, 2012
Many people in the media still use media billings to indicate the size of the account or the size of the agency. Check out Mumbrella, or AdNews, B&T or even The Australian and The Financial Review. Even overseas, Advertising Age in the USA and Campaign in the UK use media billings.
Yet these media billing measures are irrelevant and misleading when discussing the size of accounts or the size of creative agencies. So why, when there are more relevant measures in the industry, are the media still obsessed by media billings?
Before the dismantling of media accreditation, advertising agencies provided media and creative services and were largely remunerated on a combination of media commission of 10% and a service fee of 7.5%.
Therefore when discussing agency remuneration or the value of a particular advertising account the media billings was an indication of not only the total turnover for the agency, but also the revenue based on the “standard” commission and fee.
Of course, even in those times, the advertising industry, like the movie industry, was prone to exaggerating budgets as a way of talking up the significance of a win. Or deflating the billings to deflate the significance of a loss.
Before the dismantling of the media accreditation system, there was a move away from the mark up for print and electronic production. Retail clients were the first to start remunerating their agencies on page rates for catalogues instead of the costs plus mark up.
In fact one prominent retail agency at the time generated more revenue from catalogue production than they did from media. When asked to provide their billings they would take their print revenue and multiply it by 5.7 times to project it as media billings and then add it to their actual media billings.
Therefore a media budget of $10 million and a print production budget of $2 million would multiply up to be $24 million in billings. Or what about a direct marketing client who spends $10 million on direct marketing and less than a million on media, and is declared to have media billings of $58 million?
Misleading the market and themselves
How many times have you read in the trade press where an account moves from one agency to the next and the incumbent declares a significantly smaller loss than the winner declares as their gain.
Or how many times do you read that an account is worth millions of dollars in media billings when the AdEx media spend for that brand is significantly less.
Now most advertisers would prefer that no-one knows the financial details of their activities. But this doesn’t stop the advertising agencies and the media obsessing about it, even though it rarely reflects reality. In fact some people have made a career doing little more than counting these billing wins and losses.
Retainer based on resources
Today most agencies, media included, are remunerated on resource or direct salary costs, multiplied by overhead and a profit margin rather than the budget or spend.
Perhaps a better measure of an account size is the number of resources of FTEs? (Full time equivalents). This is a direct measure of the costs and complexity of an account and their advertising. That’s why when negotiating an agency contract we spend so much time and effort getting the resources and associated costs right.
So if you are interested in knowing how big a particular agency is, don’t ask them about billings, as you never know what you will get. Instead ask about the number of employees. From this you can fairly accurately project their revenue and profitability.
Media complexity sees a rise in proprietory agency tools but how do you assess value?
January 31, 2012
The use, application and output of the myriad of software tools and technological aids to better media strategy and implementation has become an essential aspect of the media agency’s armoury.
In new business pitches, touting these well developed and attractively presented pieces of software that promise to provide the highly developed and financially optimised solution to your next campaign brief has an almost irresistible allure for many marketers.
But are these tools just presentation fodder? Are they really applied to your business on a day-to-day, week-to-week basis in order to add value to each and every recommendation?
Tool or Trap?
In many cases, the ability to apply the technology relies heavily on the availability of raw data to drive the application. Most modelling tools, for instance, require ongoing ad or brand awareness to compare with alternative media lay-downs. No awareness data – no model.
Consumer insight and understanding are the core of most sophisticated recommendations today but unless the appropriate data is available through the syndicated Morgan or Nielsen databases (expensive in their own right on a category basis), it will require access to either bespoke agency data or specially commissioned research to find out anything really useful about your consumer and then apply it to the media consumption for your next campaign.
Cornucopia or plenty of nothing?
Many advertisers are either unaware of the range of technologies available to them or simply unsure of just how the alternatives might apply to their business. Sometimes media agencies like to encourage a little mystery around their expensive proprietary tools because it adds to the perception of their sophistication and the ‘added value’ they bring to the table.
Answering the questions
Based on our many years experience in this area, specialising in reviewing agency process and resources, here are a number of ways of ensuring the agency’s tools are appropriate, available and applied to your business:
- Seek a comprehensive presentation from the agency outlining all their tools and technology and how they apply it to your business.
- Make sure any descriptions in this area are clear, delivered in everyday terms and comprehensively illustrated by examples or case studies.
- Review your own data sources and the media briefs and objectives set for your campaigns and consider if they provide a good basis for a ‘technological’ solution.
- Make sure that every recommendation the agency makes is accompanied by a rationalisation that clearly describes the tools and data sources used – compare this usage to the ‘menu’ presented in their tools and technology expose.
Case studies on the mistakes advertisers make with their TV advertising productions
January 29, 2012
In the 12 years we have been assessing and reviewing television productions there have emerged three common ways advertisers drive up the cost of their television productions. Unfortunately, in almost every case, the advertisers concerned were unaware of the impact their processes and behaviours were having.
Imagine you are building a house. Would you give the architect a budget to work with? Would you outline your expectations in style and function? Or would you just let him go creatively crazy and hang the expense?
If you brief your agency give them a budget and tell them you want them to stick to it. Tell them all of the objectives you want the commercial to achieve. Tell them all of the ways you are going to use it, where, for how long, and on what media.
A client gave the agency a $300K budget and a brief to ‘lift creativity’. The agency interpreted that as ‘lift the budget’. Following three months of creative development, concept testing and international approvals, the agency presented a big idea with a cost of over $600K.
2. Making changes
Imagine walking into a house you are having built and telling the builder you want to move a wall here or add a room there. In the building industry these are known as ‘extras’ and are a rich source of profit for the builder.
The same applies for the television production industry. Once the production commences, (ie after the final pre-production meeting) every change costs you money. If you make changes and it doesn’t cost you money, then you know the agency and/or production company has built plenty of contingency into the cost.
A client briefed their agency to develop a television campaign and nearing the completion of post-production announced the packaging had changed significantly. The cost of including the new packaging added 20% to the total production cost.
3. Approval Processes
Imagine turning to the builder once the house was finished and saying, “Well. I guess it’s time to get council, electrical, plumbing and planning approval”. Especially when you know most of them will want changes and one may reject the overall plan altogether.
In extreme cases, clients have been known to race to and fro to the agency to make changes as they go through each level of final approval.
Each set of changes costs money. Worse still, the agency gets to know this is your preferred process, so they hide a cost contingency in to cover it. Either way, you pay big.
A client negotiated very competitive rates with their agency for their television production. However, in an audit of the tv production costs it was found that the company was paying up to 100% of the original production cost in changes. The agency knew the client’s approval processes were impractical and enjoyed the profits last minute changes brought with every production.
We have a number of ways to help advertisers achieve maximum value for their television production budget including:
Value based agency remuneration considerations for direct response and retail advertisers
January 26, 2012
I had an interesting conversation with a client in early December last year as they had contacted me to discuss their media and creative requirements to meet their business growth objectives in the coming year.
What made it interesting was the fact that the client thought of themselves as retailers as they were the customer facing division of a truly vertically integrated business that started with the manufacturer and ended with the customer purchase and installation. But in fact within minutes of meeting with them it was clear they were actually quite a significant direct response business.
At the same time I was in discussions with a retail client who has entered into a customer database loyalty program and e-commerce solution and is having difficulty reconciling the investment in loyalty and Customer Relationship Management (CRM) with their traditional retailing business model based on reach and frequency and co-operative funding.
Here I had a brilliant direct response business (they even managed their own in-bound call centre in house) who thought they were retailers and a retailer who could not understand how to integrate customer relationship management into their retail model.
It was time to help them define, or perhaps re-define, the business they were in and assist them in finding the right tools and resources to deliver against those business models.
Turning off the retail and turning on the direct response
They had been using media, primarily TV, press and some digital to drive reach and frequency against a broad segment of home owners (the product was for the home). The agency was on a traditional media commission based on the fact they had reasoned that if they were successful they would spend more and therefore the agency would do more and therefore should be paid more.
The problem was that the agency found ways to do less as a way to generate more profit from the spend and when leads fell the client invested more media budget trying to generate more leads and in the process was driving up cost per acquisition (CPA).
The first thing we recommended was moving to a DR Media agency with a Value Based Remuneration Model where 100% of the agency fee is based on sales and a bonus for reducing the CPA. In this way the agency was completely aligned to the business objectives of driving sales and reducing costs.
Turning the retail focus from product to customer
Meanwhile over at the retailer, they had millions of dollars invested in a traditional retail media program of catalogues with TV and press support all funded from supplier co-operative advertising dollars. In fact, you would not be surprised if this was actually a profit centre for the business which is common in retailing.
The problem was that while there has been infrastructure funds for the database and the e-commerce platform there was no funding model for the marketing of the same. The agencies on the roster had typically been selected or negotiated to a low cost position, with page rates, minimal retainers and discount hourly rates, to minimise cost and therefore maximise margin on the co-operative funding. There was no funding model for the agencies to activate the CRM and no internal funding beyond the initial investment.
The CRM and e-commerce created an opportunity to appoint and then develop a direct payment model for a database / behavioural marketing agency. This was based on a Value Based Remuneration Model with the agency being paid out of the additional co-operative funds being generated by the addition of new direct response channels in the retail model.
eDM based on database customer analytics generated significantly higher ROI for the retailer and the supplier. The problem now was that the suppliers wanted to move more of their funds from the traditional catalogue driven model, which could threaten the viability of this profit centre.
Retail and Direct Response both benefit from Value Based Agency Remuneration
Traditionally retailers have focused their agency remuneration strategies on cost reduction as a way to minimise cost of business and maximise revenue. But for direct response clients and retailers moving to more accountable CRM models and e-commerce strategies there is an opportunity to achieve greater accountability and alignment with your media, creative and digital agencies using a value based compensation model.
Let us know if you have tried this approach and what issues you had to manage by leaving a comment here.
Ten tips for managing advertising production costs more effectively
January 24, 2012
It is interesting that 12 years ago when I started TrinityP3 (Simply P3 then) that the majority of our work was in Production Benchmarking and Management. In fact some of our earliest clients still think of us as production consultants. Today, production makes up less than 15% of our business regionally, but in the past 6 months we have had an increased number of major advertisers come and enquire about production cost assessments, especially television and digital production.
But for local clients and international clients looking for delivering efficiencies and savings there is much that can be done on a local market level. But before you race off and start looking at strategic and structural production solutions, it is important to make sure you have got the basics right, which is why I created this presentation on Slideshare.
It is not that surprising the interest in managing production costs. After media, the next biggest advertising expense marketers and advertisers are responsible for is advertising production: – Television, digital, internet, social media, cinema, newspapers, magazines, outdoor, radio, direct mail and more.
The problem for most advertisers is that this area of expenditure is often shrouded in terminology that is confusing, technical and potentially misleading.
We find that the top 4 reasons marketers end up paying too much for advertising production are:
- Poor planning
- Lack of understanding
- Not enough time allowed
- Complex and convoluted approval processes
So in the presentation you will find my ten tips for managing advertising production costs more effectively. What are yours?