The Problem with Advertising Agencies and Retainers

Long gone are the days of David Ogilvy, where media agencies charged 15% service fees for media placements whilst also collecting a 10% media rebate.

Today’s media agencies look vastly different, as the major source of revenue has transitioned into monthly retainers. These retainers are often calculated at an hourly rate, similar to that of a lawyer or an accountant. Although some clients prefer this model, as they know what costs are involved each month, there are two major problems with the current model.

1. The agency is financially incentivised to create overly complex marketing strategies

As advertising agencies are typically remunerated at an hourly rate, it is in their best interest to ensure that they maximise billings with each client. Most agencies are paid with a monthly retainer; the agency is not incentivised to actively go above and beyond to drive performance and growth.

If an advertising agency is to increase its revenue through its existing clients, its only options are to increase its hourly rates or have the client increase the agency's hours. As increasing hours is the easier alternative, agencies are looking to create marketing strategies that are elaborate and complex, as a simple plan would not require many hours to deliver. Complex marketing strategies justify retainers and hourly fees, rather than crafting a marketing strategy to deliver the desired outcome for the client. As creating complex marketing strategies is the objective, delivering client results then becomes secondary. Poor results may reduce the client's overall media investment for the next campaign, however the agency will still receive the same revenue.

2. Agencies are seen as a commodity, not as a valued business partner

Advertisers have backed agencies into a corner, demanding cheaper rates and lower costs. Although cheaper rates may put a fleeting smile on the faces of the clients' finance departments, it has created a long list of media agencies, which are now commodities, with little separating their services or expertise, apart from cost.

If price is the major driver for the selection of your advertising agency, it may be worth taking a moment to think about the quality of service and personnel who will be responsible for driving your business forward. Think of your advertising agency as a new client acquisition arm; create incentives for them to deliver results, the same as you would for a hungry sales team. This way, you will ensure you get the best talent working on your account; they will be rewarded for delivering results and care about the outcomes.

If the ‘pain’ of losing the account is the only factor your agency is motivated by, this relationship will be mutually unfulfilling and fleeting. Constant pain is not a long-term motivator. When favourable results are achieved, all contributing parties should enjoy the rewards. When results are less than favourable, all those involved should feel how much it hurts to underdeliver, as these are often where the best lessons are found. Advertising agencies were once trusted advisers, helping businesses to grow; they have now evolved into a commodity that can be easily replaced.

Make no mistake - both Melbourne advertising agencies and those all over the globe have been following the same downward spiral that any commodity-based industry follows. Ask any advertising agency what separates them from the pack and common responses will typically involve lowest rates and unique technology.

Summary

As advertising agencies continue to discount their services in order to ‘win’ business, this leaves us with a burning question - how does an advertising agency CEO deliver a larger profit for their shareholders, so that the CEO and management team can collect annual bonuses, given that the the agency's clients keep asking to reduce their rates and margins? The answer is simple; the agency must cut its operating costs. Staff are the single largest overhead for any creative agency. The redundancy cycle occurs within all commodity-based agencies, with senior staff rarely given pay increases or even being laid off, in favour of younger low-cost employees. Wages within media agencies are on the decline, so talented individuals are making career changes for greater earning potential.

Technology and automation are improving and have allowed for lower overheads, however, technology only goes so far, as it still takes talented humans to interpret data analytics and guide businesses to victory. Staff redundancy is the go-to card for most struggling media agencies.

Before you embark on finding the lowest cost creative agency and requesting a ‘deal’ or a ‘discount’ for their service, think about how these costs will need to be subsidised. Leading advertising and marketing agencies are no longer discounting their services; they are instead looking to structure performance agreements around the successful delivery of client outcomes. 

If you are a business that is looking for aggressive growth, then instead of seeking out a discounted provider who will charge a retainer, seek out a performance-based advertising agency that will be rewarded as desired outcomes are achieved.