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?
12 trends in strategic marketing management for 2012
January 22, 2012
This first appeared as a guest blog in BizCommunity in South Africa and can be seen in full here.
2012 will be a year of solving the conundrums of marketing complexity. The world sitting in a now familiar state of uncertainty, with debt crisis, stagnant established markets and emerging growth markets, and continued pressure to deliver increasing returns. In the face of this uncertainty and continuing increase in fragmentation and complexity, marketers will need to develop more flexible responses to deal with a range of conundrums.
1. Chasing growth and maintaining share
Global marketers are looking for growth in the emerging markets, often funding this investment at the expense of maintaining or defending their existing markets. The conundrum in 2012 is getting the right balance between the two because under investing in established markets opens opportunities for competitors which could erode the funding required to penetrate the growth markets.
2. Knowing as many customers and as much about them as you can
Customers are no more diverse than before, it is just now they have a voice and power of numbers. Before, marketers could treat them as an amorphous group or segment. But now the individuals within that group can and do connect and share and flex their muscles. The continuing conundrum this year will be how to continue to reach a mass while being able to connect with the individuals within that group in the way they want.
3. Matching, making and managing channels
Everyone talks about owned, bought and earned media. But marketers struggle with getting the balance right. The conundrum appears to be to go for reach with the traditional bought media with little budget for investing in owned and earned, or invest in owned and earned media for greater engagement at the expense of reach. Striking the balance is difficult but in 2012, a “test and learn” strategy will provide the answers.
4. Working globally and locally
The idea of the global village is a reality with universal Internet connectivity. But it is a village of multiple communities and cultural diversity. Global and multi-national marketers are confronted with the conundrum that what they do in one market will be shared across all. Therefore in 2012 there will be an increasing need to have a consistent global strategy with aligned and localised implementation.
5. Having customers “Do” or “Know”
Traditional advertising has been focused on awareness. But following awareness is engagement. “Tell me how” is one thing. “Show me how” is another. But let me “do it for myself” is engagement. The conundrum is how to strike the balance in investment between driving awareness and engagement to meet expectations.
6. Small ideas or a BIG idea
You load up your advertising with the big idea, you aim it at the target audience and you fire. And you keep doing it until you run out of firepower – usually budget. But now fragmented targets require a more granular approach with an on-going “test and learn” process is replacing the old campaign model. The conundrum is that most marketing strategy (and its funding and execution) is campaign driven and so 2012 will be a year of transition.
7. Mobile for reach or engagement
The conundrum is not mobile or not, as any brand wanting to engage customers needs to think mobile (It is the main access to internet in emerging markets). The conundrum is how. With so much opportunity for reach and engagement, too many have failed using the mobile for awareness and there has only been nominal success in brands using mobile for engagement. But in 2012 that will change.
8. Collaboration or alignment?
To embrace complexity requires collaboration both within the organisation and across the organisations engaged. But the conundrum is that collaboration requires alignment. But aligned to what? Corporate objectives? CEO vision? Brand? Sales projections? The customer? The first step to creating collaboration is to agree what is it you are collaborating on and to what outcome. Internal and then external alignment.
9. Who owns digital?
Digital is not just the all-pervasive platform of marketing. It is the same across the whole of the business world. Websites, social media, and other external communications meet internal finance systems, inventory control and logistics. Nowhere is this more obvious than e-commerce. So the conundrum is who owns digital? This year the CMO, CIO and the CFO will become new friends for every company embracing social media and e-commence.
10. Pay for results or value but not costs
Much of the cost of advertising is simply a cost. The cost of media. The cost of agencies. The cost of production. But with the increased pressure on marketing and advertising cost, the conundrum is how do we move from this cost based approach to a value or results based model. It is no longer acceptable to be a cost of business, but for marketing to be an investment, this year we need to stop thinking about costs and start focusing on value and the return on investment.
11. Social media is in-house and out-house
While traditionally many organisations outsource their communications needs to specialist agencies, social media is causing a rethink. In-house or out-house? With the opportunity to engage your customer in a conversation it is not just a marketing channel, but also a customer service tool, a reputation management function and a customer relationship management application. So is it in-house? And if so who owns it? This conundrum needs to be answered this year.
12. Who is responsible for CSR?
The customer is talking about you. And not just your products and services, but the way you manufacture them, the way you treat suppliers and employees, the environment and in fact all aspects of your business. But it is not just another channel to be managed. The conundrum is how do you make Corporate Social Responsibility everyone’s responsibility.
What conundrums are you facing or dealing with at the moment? Why not share them here with a comment and lets see if we can solve them together.
What is the industry benchmark cost of producing a television advertisement?
January 19, 2012
The perennial $64,000 question. Or in many cases a damned sight more. The fact of the matter is that it usually costs whatever the budget is that has been assigned by you – the client. In many instances, it costs more.
How often do you brief your agency to provide a TV concept within a given budget, only to have the estimates on the approved concept come in at 5%, 10% or even 50% higher? Or, how often do the estimates come in within a few thousand dollars of each other and within the budget? Does this really equate to the actual cost of the TV production?The cost of the television commercial is driven by the concept itself and the marketers budget. The budget is set by the marketer based on the level of investment and the potential return like this spot for Hahn.
What drives TV production costs?
The first driver is the concept itself. There is always a minimum production cost for producing a commercial, but theoretically, there is no upper limit. Often, the agency and film company will arbitrarily continue to add enhancements, contingencies and experimentations into the process, thereby driving up the cost – if there is no set upper limit.
What drives the upper limit is your budget or at least the upper limit of what the agency believes you are prepared to pay. This will be based on either the stated budget, or in the absence of this, previous budgets for similar executions, the level of importance which you assign to the campaign, your level of experience in such matters, and a range of ‘mitigating’ circumstances.
So what’s the solution?
At the outset, set a firm budget – before you brief the agency. This should be calculated based on:
- The projected ROI
- The planned media budget for the first year or phase of the campaign
- The category in which you conduct your business
- The strategic importance of the particular task
TrinityP3 has comprehensive industry benchmarks for assisting you in setting realistic budgets based on these factors. Having established your budget, you should have your proposed productions cost benchmarked at the concept stage.
Once your agency has responded to the brief with the concepts you are considering for approval, but before investing any more time or money in concept research or testing, contact us and we will provide you with an independent and qualified assessment of the cost of producing one or all creative concepts.
Our quantified and qualified estimates are provided within 48 hours of receiving the creative concepts and normally cost less than 1% of your production budget – a worthwhile investment in anyone’s language.
But more importantly, it is invaluable in ensuring you have a realistic expectation of the real production costs. It enables you to control costs without compromising the quality or integrity of the concept before final sign off, which results in an avoidance of unforeseen budget overruns once production has commenced.
In short, you know precisely what you’re up for up front and you are able to minimise any unforseen financial variations.
Better agency pitch practices for better client / agency relationships
January 17, 2012
I feel like I am constantly seeing reports and articles about the flaws of the advertising agency pitching process. A common theme of these articles is the fact clients often select agencies based on their creative potential but usually fire them for relationship and service related issues.
So how can you ensure your pitch process builds the foundations for a solid long-term relationship?
TrinityP3′s top 5 tips on pitching for the long term
1. Have a clear understanding of what you want
What may seem the most obvious is often the most overlooked in the rush to get the pitch progressing. It is worth really defining what you are asking the agencies to solve now and what briefs you may have after the pitch is over.
2. Plan it more like a test drive than a date or beauty parade
Whilst pitches have roughly had the same format over the years, it is important to determine the level of input you require from your agency after the pitch and build this into the pitch process. If you require regular strategic input and insights from key staff at the agency including creative teams, we suggest a day long workshop with each of the short listed agencies to ascertain the chemistry not only in personality but in the solving of marketing problems.
3. Who is paying, you or them, because no one wants to split the bill
Regardless how great the creative solutions and how well the chemistry is going, if you don’t ensure you negotiate a framework that allows you to get the service you need at sustainable rates for both your business and the agency, the relationship is likely to fail over discussions that detract from the core business objectives. It is also important to keep the performance criteria simple enough to be measured.
4. Be clear and up front in what you want and expect
Be clear in how you plan to run the pitch and how you plan to work after the pitch is over. In any relationship that fails, it’s usually confusion over expectations that are the cause.
5. Be prepared to spend the time to really get to know each other
The average pitch can require 600 – 800 internal head hours. As you are selecting a partner to help achieve key business goals it is worth allocating the time upfront. It is also important key decision makers have the time to consider the agencies properly and not get caught up in the administration of the pitch.
These are mine.
What do you suggest?
Leave me your suggestions as a comment here and lets see if we can expand the list to ten!