As noted at the beginning of this chapter, the relationship between agencies and advertis- ers runs the gamut between extremely close business partners to one where a “divorce” can come as a complete surprise to the agency. To better understand the complexities of this relationship, we start with the question of what advertisers pay agencies for. A com- mon answer is “great advertising.” Before the 1990s advertisers got the greatest proportion of their revenues from commissions on media purchases. For example, if they bought $1 million worth of media to place an ad, they got a percentage of that “spend.” Starting in the 1990s the media commission virtually disappeared and advertisers paid their agencies fees depending on the actual amount of work (usually in hours) that they put in. Many have argued that for advertisers and agencies to truly be business partners, payment should be based on “value” of what the agency does. For example, the agency should be paid more for a campaign that creates more sales than for a campaign that produces fewer sales. Today, however, very few advertisers compensate this way, with 75 percent of those polled indicat- ing that they pay fees (A8; http://adage.com/article?article_id=143644).
In an opinion piece, Wayne Arnold suggests that there is little evidence that agencies are playing the role of business partner to advertisers (A9; http://adage.com/article?article_ id=138795). He provides the famous examples of how agencies in the past have helped create new products or products sufficiently different to create vast new market shares for advertisers (although one of them involved repainting airplanes!). But recently, Arnold re- ports, agencies became more focused on producing commercials, and as a result, experts in less profitable specialties were pushed out, with the net result that agencies were good for one thing: producing advertising. Arnold says, “if a pharma client wants to get closer to the medical industry, we . . . give them nurses and a training program which enables a nurse to do 95% of what a doctor can do in half the training time. Now that’s delivering real value.”
So one reason that agencies might be getting summarily dismissed may be that they no longer play the role of partner and are instead considered by their clients as just a service
Media 15
for acquiring advertising. Ad Age suggests some possible solutions (A10; http://adage.com/ article?article_id=143508). One problem is that media companies from Google to Condé Nast, which publishes magazines, are offering advertising development that directly com- petes with agencies. Another is that so many new skills and understandings are needed for handling a brand in the digital environment (from smartphones to Twitter) that agencies aren’t able to provide the necessary expertise. What can be done? The experts interviewed have some great ideas. Which ones make the most sense? Consider these possibilities as areas that you can specialize in and provide clear innovation possibilities to the industry.
How to Save the Troubled Agency-Marketer Relationship
Ad Age Gets to Bottom of the Problem and Helps Point the Way Toward Solution
In a time of significant change, traditional business relationships are often disrupted and the marketing communication business is a prime example. This article identifies some of the reasons for the fraught relationships between clients and agencies and then gets views from top industry insiders about solutions to improve those relationships.
One key issue is that the lines between different functions and roles are blurred. The author cites the case of Home Depot’s efforts to reach out to Hispanic consumers. The home improvement retailer put its business up for review, thus inviting agencies to offer their visions and possible campaigns to promote Home Depot. Some controversy arose between agencies specializing in Hispanic marketing and traditional agencies attempting to increase their multicultural capabilities.
Similarly, media companies that traditionally didn’t get involved in creative cam- paign production have branched out. Some firms created in-house agencies believing they could save money essentially by doing their own advertising.
Here are some of the factors top marketers and agency folks think are important: Clients are demanding more for less and production budgets are being slashed. •
(Production budgets fund the actual creation of ads such as hiring talent, shooting video, photography, and other costs.)
How to compensate agencies is a continuing problem. In the past, the formulas were •
quite simple, usually a percentage of the costs of fees charged by television networks, magazines, and newspapers to run the commercials. Today, no one is sure how to charge for a Facebook page promotion or a viral video. Everyone is looking for ways to link “price, performance and value.”
Globalization is putting pressure on firms’ marketers and on agencies who are trying to •
figure out how to appeal to highly diverse cultures in a cost effective way.
The vast numbers of choices consumers have in selecting media have also vastly com- •
plicated the jobs of advertisers. A fragmented media world means that agencies must become specialists in many different types of channels.
Solid data through research and analysis are increasingly important in showing what •
worked and why. Creativity and the ability to measure results must go together and it’s important that measurement is not seen as the enemy of creativity.
Media
We’ll look at the great array of media in detail in succeeding chapters. Here we provide a broad overview. Traditionally, there were four main advertising media: print, tele- vision, radio, and direct mail. The digital revolution has led to a much more varied world of
16 CHAPTER 2 • Business Structures in the Advertising Industry
channels by which to bring advertising to its target audiences. Once a year Advertising Age reviews the top one hundred media companies, with the most recent review in 2009 (A11; http://adage.com/article?article_id=141212). Just as we saw advertisers spending less on advertising, and advertising agencies making less money, revenues sharply declined for media companies in 2009. Eleven of the top one hundred media companies entered bank- ruptcy, although six of them survived and emerged from bankruptcy court. Newspapers showed the worst drop in revenues, twice that of the second worst, magazines. The winners during this worst year of the downturn were not digital, as we might have expected, but cable. Fronting cable’s success was Fox News, up nearly 23 percent; CNN, up 15 percent; Fox Sports Network, up nearly 13 percent; and number-one ranked ESPN, up more than 9 percent. These are media properties that have found their loyal audiences and continue to build audience.
In the media report for 2009, be sure to notice the top twenty social networking sites. How many of these did you visit last week? It is interesting to note that none of them, not even Facebook, have ever made a profit!
As we saw in the analysis of advertising agency problems, many media are attempt- ing to become producers of advertising. Perhaps even more threatening, however, are the large search companies attempting to become media. Columnist Simon Dumenco reviews Google’s business efforts aimed at allowing it to obtain greater advertising revenues (A12; http://adage.com/mediaworks/article?article_id=141250). Of course, Google now owns YouTube and certainly has been trying to figure out how to connect advertising with You- Tube more effectively, so technically Google already is a media company. But in attempting to buy Yelp, at which it failed, Google indicated a strong desire to create a “news” or direc- tory site that would carry advertising. Google and Yahoo have actually become not only media, but also advertising and marketing companies.
Ag Age considered the question of the future of media companies (A13; http://adage. com/columns/article?article_id=140091). Ironically, Bloom suggests that the successful media company will be more like a marketing company. He suggests that advertisers and agencies want to surround their messages with specific audiences who will welcome those messages. This reflects the new importance of advertising context, programming, or con- tent that greatly increases the likelihood that the advertising makes sense with its presence.