How Advertising Agencies Can Make Money While They Sleep
Most companies make money while they sleep because they sell products or services with recurring revenue streams. But most professional service firms — like advertising agencies — only make money when they’re logging hours to a time sheet.
Under the current time-based billing model, advertising agency income “per unit of work” has fallen 40% during a steady 20-year decline. So reports agency consultant and advisorMichael Farmer, whose research demonstrates that agency staffs are being squeezed to deliver increasing workloads at a time when fees are declining faster than costs.
The solution to better margins is obviously not to work harder or do a better job of collecting time sheets. To be able to return to the profit margins they had 20 years ago, agencies need new, different revenue streams.
Part of the problem is that the immense brainpower and creativity in agencies is wasted on the increasingly routine and somewhat mundane production work that now accounts for around 80% of a typical agency’s revenues. Many agencies have been pushed so far downstream that they now sometimes compete directly with printers, publishers, and production companies for work that is seen by clients as increasingly commoditized.
Companies may not need advertising, but they all need marketing
As every agency knows, today marketing dollars are being spent in new and different ways, and the budgets that were usually allocated to traditional agencies are being reallocated to initiatives and channels that have to do with “marketing” but not necessarily “advertising.”
It’s an unfortunate fact that the term “marketing” has become associated almost exclusively with only one of the four P’s of marketing: “Promotion.” But of course, marketing is also made up of Product, Place and Price. Agencies and client marketing organizations alike are becoming increasingly marginalized in the business world by allowing themselves to be boxed into just the Promotion business.
Each of the other overlooked P’s of marketing – Product, Place, and Price – represent an area where agencies can create tremendous value for their clients. Some progressive firms are already playing in this space, applying “design thinking” to issues ranging from the optimal design for a bicycle to the experience patients have coming to an emergency room.
Not your father’s awards shows
One telling sign that agencies are now actively developing alternative sources of revenue is the new crop of industry competitions based on inventions and innovations, like the newProject Isaac competition sponsored by Adweek. Instead of the usual categories like print and broadcast, the categories are named such things as Marketing Invention, Brand Performance Invention, Design Invention, Product Development Invention, Digital Publishing Invention, Human Resources Invention, and App Development Invention.
Even the Cannes Lions are moving in this direction with a new “innovation” category this year, along with other newer categories like Branded Content and Cyber. This year’s winner of the new Innovation award is The Barbarian Group, who developed a software-development platform for creative coders called Cinder, which provides a toolbox for programming graphics, audio, and video – some agencies actually used this to prepare their Cannes entries.
The Design award at Cannes is no longer for nice-looking graphics, but rather for game-changing innovation like what the German agency Serviceplan did for their client, a grocery story chain in Germany called Auchan. The agency was able to embed the stores’ sustainability report on a single shopping receipt, allowing users to scan it and get all kinds of information on the grocery chains’ sustainability practices.
Other organizations like Digiday are now sponsoring Agency Innovation Camps, devoted to helping agencies get beyond mass messaging to solve marketing problems in new and different ways.
Will Nicholls, from the British agency Dare, puts it this way: “Traditionally, agencies have created value for their clients through better and different communications. But brand behavior can now come to life in digital product, services, and experiences.”
Creating value in new and different ways
What all this means is that agencies have an important new role: creating value for marketers in ways that have nothing to do with a “message.” Smart marketers know that mass media messaging is an increasingly ineffective way to get traction for a brand. So by thinking creatively about brand marketing is not only a way for agencies to earn revenues outside of advertising, it’s increasingly a strategic imperative.
Havas executive and Victors & Spoils co-founder John Winsor puts it this way “Instead of being executors of communication campaigns, we must become inventors, architects and conductors. The brands we all love see themselves that way. Nike and Apple, for example, don’t really make anything. They invent products but leave it to their vendors to build them. It’s much better to be an Apple than a Foxconn.”
Tim Williams leads Ignition Consulting Group, a U.S.-based consultancy that helps advertising agencies and other professional service firms create and capture more value. He is the author of Positioning for Professionals: How Professional Service Firms Can Differentiate Their Way to Success. Tim is also co-founder of Thought Legion, a leading provider of training for marketing professionals via live and on-demand webinars.
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