There are many ways advertising agencies are compensated. Originally agencies were paid 15 percent of the media they bought on the behalf of clients. Agencies would charge the clients in gross dollars and pay the media companies in net dollars. The spread, which was 15 percent, paid for their creative and media services. That approached worked well for over 50 years.
But then agencies began unbundling their services, creating separate creative and media agencies. Each agency had to be paid separately. Clients still tried to keep their advertising costs to 15 percent, but now that they could negotiate with two different agencies, they quickly realized that they could buy creative and media services for less. Agencies also had a hard time justifying which part of 15 percent belonged to them. Were creative services more valuable than media services? The market quickly decided that the creative services were worth more and the media services were commoditized. After all, did it really matter who bought a 30-second spot in Charleston in primetime?
Media agencies never really recovered from having to justify their fees. For that matter, creative agencies have also had a hard time justifying their value, which is why the most prevalent form of agency compensation is labor based.
Clients will send an agency a scope of work. The agency will tell the client how much time it will take to deliver on the scope and what the staff time costs. The labor cost becomes the fee. Usually the client will try and negotiate the overall cost and the agency will negotiate the scope, ie if the client wants ten projects completed it will take 1000 hours which cost $xxx. If they want to pay a lesser fee then can the client manage with eight projects?
Rather than focusing on winning at the fee negotiation, which is always about getting more for less, I recommend agencies focus on creating demand, which is something I call “wantedness”. We’ll have a much better shot at protecting our fees if we can bullet proof ourselves before we even start negotiating a fee.
More and more, when a client wants to work with an agency, it will insert that agency in the procurement process and insist that a particular agency be hired. When I’ve asked those clients why they did that they said because they were convinced the agency would deliver great work. They believed there was only one agency to work with. Sometimes the client can force the decision;, many times they can’t. But agencies need to increase the chances that the client wants to work with them way before the fee negotiation commences.
There are many things agencies of all kinds, creative and media, can do to create wantedness and many of them have nothing to do with the work. The following are a few things we like to keep in mind while we’re pitching, which usually set us up for a very successful fee negotiation.
1. Likeability matters: Over the years I’ve seen brilliant ideas presented by sad people who are just not very likeable and I’ve seen less than brilliant ideas presented by charming people. The charming people usually win.
2. Office décor matters: Big ideas happen in interesting places and clients know that. Make sure your offices are cool.
3. Presentation design matters: Most people, including clients, will tell you they hate PowerPoint. Yet most agencies still present ideas using PowerPoint. Spend some money designing a beautiful presentation. How we present our ideas says a lot about how we value them.
4. Pitch team chemistry matters: It’s awesome to watch a group of people who really like each other present big thinking. They’re a team that supports and encourages each other. Clients love watching that because they believe this is a team that will tackle any problem together.
5. Ideas matter most: Of course if the ideas are not transformative then nothing else matters. But big ideas presented poorly rarely get heard.
Apart from the five important areas listed above, think about how your team dresses, what you serve in the meeting, how your receptionist greets the clients and what the leave behind looks like. If you start thinking about these details, I’m sure there will be dozens of other details you’ll think about. All of these details say premium and all of them help create wantedness.
Walmart has shown that there is a huge market for the lowest price goods. Hermès has shown there is a very large market for premium goods. Most agencies believe their ideas are premium but they have a hard time justifying their fees. We can all learn a lot of lessons from the luxury goods merchants on how to create wantedness before our customers even get to the cash register.