Agencies Have a Self-Confidence Problem

Advertising agencies chronically under-appreciate their value. Especially when compared to other professional service providers — law firms, accounting firms, consultancies, etc. — agencies are much less likely to be paid a premium price for their services.

This disparity is first evident when comparing hourly rates. Lawyers charge three times what agency professionals do (I detest the concept of hourly billing, but since the practice is still so wide-spread, I’m compelled to start here). High-profile attorneys will charge several thousand dollars per hour, whereas the star performers in agencies almost never break the psychological barrier of $1,000. In agencies that charge a “blended rate” (perhaps the worst remuneration method ever invented) that figure is almost always below $250.?

In the deeply flawed hourly billing system, most agencies are so sensitive to the way clients will react to expensive hourly rates of their most senior executives that they decide to not bill for this time at all, attempting instead to capture it in the volume of hours charged by the rank-and-file people working on the account. This approach would never fly in a law firm, but is almost standard practice in advertising agencies, and is emblematic of the agency industry’s inability and unwillingness to capture the tremendous value they create for their clients.

Your client’s most valuable business partner?

Broadly speaking, attorneys and CPAs are mainly in the business of helping their clients?save?money by protecting their interests, managing tax liabilities, etc. While this is admittedly a gross oversimplification, consider that advertising agencies largely play on the other side of the equation; they?make?money for their clients.?

Peter Drucker famously argued that "The purpose of a business is to create a customer.” Among professional service firms, only one type is suited to do this: the marketing services sector. Drucker presses this point further by reasoning that “The business enterprise has two -- and only two -- basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs."

Litigation, compliance, governance, and audits are all costs. The activities of attorneys and CPAs are largely designed to help?protect?revenue. But to?grow?revenue, companies depend on the proactive ideation provided by advertising agencies in all their various forms. Today there are hundreds of areas of specialization in the agency business, ranging from mass media advertising to search engine marketing. But these firms all have the same central goal: to create and maintain a customer.?

Agencies are therefore arguably a company’s most valuable business partner. But they lack the perspective and self-confidence to ask for fees that align with the value they create.?

What’s not on the spreadsheet

This argument can be framed in another, perhaps even more convincing way. The market value of any company is comprised of both tangible and non-tangible assets. Tangible assets can be easily identified, calculated and reported on spreadsheets, consisting of cash, physical assets, etc. For most public companies, tangible assets represent somewhere around 30 or 40% of their total market value. Which of a company’s business partners is involved in overseeing and managing tangible assets? Most of the traditional providers of professional services in law, accounting, architecture, financial services, engineering, and information technology.?

The intangible value of the company — the remaining 60 or 70% — is the territory of creative agencies, media agencies, digital agencies, social media agencies, direct marketing agencies, and public relations firms. Most of a company’s value is a direct result of Drucker’s “marketing and innovation.” This is the brand equity of the company, which means the marketing services business can take the credit for creating the lion’s share of a company’s value. Yet, again, we see the marketing services business charging fees that are substantially lower than most other professional service sectors.?

Some would argue that marketing services aren’t truly “professional services” in the sense that marketing isn’t an actual profession (as compared to law or medicine, where professional accreditation is required). True enough, but professional certification requirements hardly explain or account for the value placed on the services of a particular individual. Actors and sports stars are prime examples. Talent is talent.

Marketplace effects

The case studies emerging from the marketing services business are often astounding. Consider the long-term value of “Just do it” for Nike. Every year, “The Effies” awards are given not for creativity but for effectiveness, documenting the marketplace results produced by advertising programs around the world. The annals of advertising history are replete with examples of companies doubling their revenues as a direct result of the work of a single advertising agency partner, yet it’s almost certain their agency was paid one-third the amount a law firm would have charged for the same effort (as measured by hours spent).?

Who bears responsibility for this sort of economic injustice? Certainly not the client company. It’s not their job to determine the pricing methodologies of their business partners. The responsibility falls squarely on the shoulders of each marketing firm individually. Not only is this industry impacted by a self-confidence problem, but it also ironically suffers from an immense lack of imagination when it comes to its own revenue model.?

Fortunately, this is beginning to change as the agency business attempts to catch up to the pricing revolution that has swept through the rest of the business world over the past few decades. The way for the marketing sector to capture its fair share of value isn’t just to charge more, but to charge differently. Stop selling and pricing inputs (hours) and start pricing what your clients are really buying: outputs and outcomes. As one firm put it, “Our fee doesn’t cover our time, but rather our experience, expertise, and industry knowledge.”?

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Tim Williams?leads?Ignition Consulting Group, an international consultancy that advises?agencies and other professional service firms in the areas of business strategy and revenue models.?Tim is the author of several books, including "Positioning for Professionals: How Professional Service Firms Can Differentiate Their Way to Success." Tim also writes a monthly blog,?Propulsion, and shares insights on Twitter?@TimWilliamsICG.