Agencies Face Both Evolving Client Needs and Vast Changes in Media

The world of advertising is largely driven by advertising agencies, both large and small. The biggest agencies are made up of large numbers of subsidiaries and operating units. Specialized groups and business units within the agencies focus on specific tasks and client needs: media planning and buying, digital media, marketing, branding and public relations, in addition to the more traditional production of artwork, advertising copy and related tasks.

For most of the history of the agency industry, business was done on a cost-plus basis. Bills came into the agency from such suppliers as photographers and magazines, the agency added 17.65% onto the costs, and finally, marked-up bills were sent to clients. In this manner, a $10 million campaign would be marked-up to $11.765 million once it was billed to the client. In addition, agencies might bill for internal costs such as consulting with clients, generally at substantial hourly or package rates.

However, client attitudes to costs and charges have changed dramatically, and clients want more control over total costs. Today, more than ever, clients are focused on cost effectiveness and return on advertising investment. In addition, they want trackable advertising results whenever possible. Marketers are working to cut costs paid to advertising agencies, scale back on the number of agencies employed and increase marketing efficiency.

As a result, many agencies are making new types of deals with their clients, with supplier and media costs passed along at no markup and set hourly rates for various creative and consultative tasks performed by the agency. Other agencies are offering fees based partly on time spent and partly on actual results. For example, a national advertiser, Peet’s Coffee & Tea, reportedly made a deal with a major digital advertising agency, Razorfish, to launch a new online strategy and web site. Instead of set fees, Razorfish earns a portion of increased profits, if any, that result from its efforts.

Another massive change in agency operations is fostered by the ease of finding and managing creative freelancers, thanks to the internet and specialized web sites. For example, Upwork, www.upwork.com, (formerly Elance), and Guru, www.guru.com, both make it extremely easy for an agency, small or large, to look at creative portfolios of individual writers, artists and photographers, and ask for bids for specific projects. Other sites like Catalant, gocatalant.com, formerly HourlyNerd, offer access to MBAs and other professionals for marketing, strategy development and research purposes at reasonable costs. DesignCrowd, www.designcrowd.com, lets users request creative ideas for logos and other needs from an online database of more than 500,000 designers around the globe. In fact, globalization, fueled by the internet, is the driving force behind all the examples noted above. These creative freelancer sites are populated by millions of potential designers, writers and artists from India to the Philippines to Australia, Canada and America. Many offer excellent resumes and portfolios while charging very modest fees.

Another trend in advertising is for companies to form their own in-house agencies to control costs and take advantage of brand awareness. Who would better understand a business’ products than their own people? A 2018 study by Forrester and the In-house Agency Forum found that 64% of surveyed respondents had in-house ad agencies, compared to only 42% in 2008.

The pressures and changes in the advertising agency industry are very similar to those faced by large law firms and management consulting companies. In all of these sectors, clients want more transparent, affordable billing procedures, global reach and trackable results.

The pressure on ad agencies and consultancies is resulting in a variety of merger and acquisition activity. Part of this trend is the need for large agencies, those that formerly focused on traditional media such as network TV and magazine ads, to boost their expertise and offerings in digital advertising.

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