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Blueprint for a new business model

28 Jun 2010  |  Nick Manning 
Blueprint for a new business model

Media agencies are struggling to invest in the services clients really need thanks to their post-war business model. Nick Manning, chief operating officer at Billetts, explains why they should change their ways and how clients would benefit...

By common consent, the media agency business model is not in the best of health.

In recent times, the agencies have supplemented their traditional media planning and buying services with digital, data, research, effectiveness and branded content resources. Core remuneration, however, is often still based around a commission system designed for an altogether simpler age.

The fact is that agencies still make the bulk of their money from the established trading model and "other media income" (OMI), in the form of outdoor rebates, unbilled media, ad-serving mark-ups and spin-offs such as interest on client money and deferred payments to the media.

These two income streams subsidise newer services, especially digital, which make little or no money. Even the new services that are profitable make a much lower margin than trading.

When times were good, the old business model just about held up. Media agencies were making plenty of money, and OMI boosted margins. The defects in the business model were ignored as long as the agencies' shareholders were happy and everyone got handsome bonuses.

However, even in the boom years, there was pressure from holding companies such as IPG, Publicis, Omnicom and WPP to maintain the 20% plus margins that subsidised other forms of marketing communications. This arguably contributed to an under-investment in people, technology and other resources to meet the emerging demands of the digital age. The cracks were beginning to show.

In 2010, those cracks have become structural. As the recession bit in 2009, budgets tumbled and income fell, while $20 billion worth of new business pitches and even more private renegotiations forced agencies to accept reduced margins.

Client procurement specialists have had a field-day as they attacked fees and commissions and trimmed back OMI in the name of transparency.

Media agencies remain significant profit-earners but the danger is that the trading-led subsidy has been so reduced that agencies will find it impossible to provide the new range of services that their clients require, while maintaining the 20% plus margins demanded by holding companies.

The media agency business model desperately needs a radical rethink. An issue is the ability to charge a realistically profitable rate for the new generation of services now required at a time when the traditional income has begun to dwindle.

Must learn new skills

The agency of the future must add to their traditional skills by developing new services in three key areas: consumer insight, data analytics and the development and use of technology platforms.

These disciplines are key requirements for brand-owners in the digital age and will become as important as planning and buying paid-for space.

Clients need to track consumer behaviour in a world where share of attention is more important than share of voice. Segmentation of customer groups for targeting purposes will overtake the traditional audience definitions, and customer databases will become a common source of targeting data.

There is an emerging requirement for new insight into consumer behaviour, attitudes and paths-to-purchase, using data derived from a variety of sources, many of them real-time and very few of them, probably, diary-based.

The growing range of media options, many of them ad-free, creates a real headache for strategy and planning practitioners and the media process needs to encompass not just the new set of media "touchpoints" that can be controlled, but positive advocacy and sentiment in user-generated channels.

The primacy of digital channels also means that the interface between content and media distribution will erode. Media agencies will both create and place content-led programmes in a range of digital channels, across a variety of platforms.

Social media platforms, for example, are complex and time-consuming to manage but involve very low budgetary outlay. Agencies must continue to develop skills in this area, harnessing the positive effects of brand exposure but also managing the potential for negative brand content.

Knowing how and when to connect effectively with a brand's audience across a variety of channels will become even more vital, and data analytics will have a big part to play; new techniques will be needed to capture, measure and analyse the growing volume of actionable data.

For example, with the number of mobile internet-users due to surpass the "fixed" internet universe around 2013, agencies will need to find new ways to track and measure internet usage on multiple devices.

Measuring what works

The media industry also needs to focus much more on effectiveness. The main focus of the last 10 years has been engagement, the ability to generate cut-through. Engagement, however, is only a means to the real goal of delivering a business result.

In a world of hard metrics, effectiveness has to be at the heart of the media agency service. The wealth of data produced by digital media will form the basis of a new generation of measurement tools.

Agencies will need to dedicate significant resources to data analytics to place it front and centre of the planning process, building predictive modelling to improve ROI based on data harvested in real-time.

To underpin all of this, agencies must also address their biggest area of weakness: technology, both the use of technology in creating brand communications platforms for clients but also its use in business process.

Much of today's media agency work is untouched by smart IT, and this is perhaps the biggest challenge. It is surprising how slowly trading platforms have been adopted by the industry.

The agency of the future will dramatically improve productivity by focusing on business process improvement.

What's in it for clients?

Clients will be keen to back this new model for three reasons. Firstly it means that plans will be optimised to meet their objectives and not simply to serve agency deals or historic precedent.

Secondly, media investment could be assessed on the basis of business growth and not simply efficient delivery of audiences and cost benchmarks. Finally, improved transparency and trust would foster stronger agency relationships.

For the new blueprint to work, however, there has to be massive change in how agencies charge for what they do.

Until now, agency rewards have been based on the mechanics of buying advertising, receiving a share of budget, incentives for better buying and sometimes a share of savings. In other words, they have been paid for the money they save, not the money they make.

The first change will be a shift towards a time and materials approach. Charging for the time spent creating and delivering a client's brand communication activity will provide one source of income.

However, this will not be enough to generate current margin levels and will not fund the business transformation required. If agencies want to get themselves out of the commodity cul-de-sac, performance and remuneration must be measured against the business task.

A new form of Payment By Results

Attempts have been made to introduce a PBR element to remuneration with little success - schemes have foundered on imponderables such as retail distribution, price and other variables in a world of broadcast advertising.

Agencies need to link their fortunes to the positive contribution they make to client success. Until now this has been difficult but the interactive nature of digital channels will allow the media agencies to measure the impact of activity, allowing them to base income on new metrics, such as click-through rates, cost per customer acquired, incremental revenue per customer, as well as more generalised profit or margin uplifts.

The digital world allows for much closer measurement of cause and effect, and the ability to identify shifts in responsiveness.

The real upside in agency income must come from the virtuous circle of great agency performance helping to deliver outstanding business success, with agencies negotiating additional margin for stellar business results.

So, who will drive the move towards more business value-based income generation?
This is where the industry is crying out for some leadership. The big communications groups need to pioneer new approaches. They have the depth and breadth of assets to deliver these new services, and they have the strength to be able to force through change.

Frankly, they can also afford to take some risks along the way. The industry needs the big groups to initiate a move away from the trading-led model of remuneration towards a business-value driven income framework.

For the enterprising agency group prepared to grasp the nettle of delivering a smarter range of new-age, integrated, comprehensive media agency services with a sustainable profit model based on business success; first-mover advantage is still available.

The new business model

The bad old days
  • Trading and OMI provide the bulk of income
  • New services are loss making or low margin
  • Commission underpins most remuneration
Blueprint for a brighter future
  • Three core skills: consumer insight, data analytics and technology platforms
  • Basic remuneration is provided by "time and materials" formula
  • Bonus income comes from delivering business success

Your Comments

Thursday, 1 July 2010, 16:55 GMT

Nick Manning's article raised some important issues on the current media agency business model.

I describe agencies as being 'in a deep hole'. The potential opportunity for them remains huge. They are perfectly placed to become the client's 'trusted advisor' (a role claimed by everyone from ad agencies, through branding consultancies, to market research agencies). The best media agencies manage successfully to blend creative abilities with analytical skills, which makes them well suited to work successfully across disciplines.

And yet they are in danger of blowing the chance. One agency group CEO has described his industry sector as being on the brink. On the one hand, the agency becomes a true communication consultancy, charging high fees for smart advice and with payments linked to the client's marketplace success. On the other hand we have what he described (with apologies to that part of the country) as the 'South Wales solution'. In this scenario the agency simply buys; the sector invests in online auction technology, stops investing in research and tools, automates everything, moves to an industrial estate and becomes a pure trading organisation.

The former is all about high margin fees, and advancing knowledge. The latter is about trading models and low fees.

... to read Brian Jacob's full follow-up article, click here

Brian Jacobs
Founder
Brian Jacobs and Associates
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