Pricing can kill agencies... but it doesn’t have to
How can agencies improve commercial performance with pricing?
“What’s really killing agencies and holding companies is the declining level of agency fees and billing rates, and the uncontrolled growth of agency workloads. These are ‘price problems’ rather than ‘cost problems’ and they are not currently being addressed by agency CEOs.”
Back in 2015, the now pre-eminent strategy consultant Michael Farmer wrote about the rapid profitability decline of agencies in his book Madison Avenue Manslaughter. He has since been quoted by many, but he is one of several others that have made the observation: the biggest challenge agencies face is not in creating value, but in conveying that value to clients.
How exactly do you put a price tag on your services that increases your commercial performance?
In our latest collaboration with the Institute of Practitioners of Advertising (IPA), we reviewed 27 reports on the subject, and spoke to over 30 executives across our industry and beyond to really understand what’s working, what’s not, and how we can more effectively align price to our values.
Here's what we found
This is not a new question, but it has become a pressing one. In fact, some of the reports we reviewed date back to 2006. The trusted default Cost-Plus Billing model – which charges for time spent – is increasingly inadequate in capturing the complexity of marketing activities. We are also starting to see cracks in the idyllic model of Payment by Results:
“At the turn of the millennium, nearly three-quarters of schemes were paying out one-half or more of the maximum PBR. A good bet for agencies - on the face of it. Now just one-quarter of schemes do. Put another way, in 2000 just one in seven schemes resulted in no pay (nada) – now six in ten don’t pay out! That’s not an attractive bet to agencies.” (Paying for advertising - creative agencies, ISBA 2016)
What we have today is not really working. Meanwhile, everyone is trying to become a voice of authority on this matter. Not only are industry bodies, such as ANA, WFA and ISBA tackling the issue, but strategy consultancies including BCG (Boston Consulting Group), McKinsey & Company and independent experts such as Forrester are publishing their thoughts, and advising clients on how best to price agency services. It's an increasingly urgent issue for us to solve as an industry.
What we learnt
There isn’t a single silver bullet. One pricing method truly does not fit all. After all, agencies are different, with an increasingly broader range of offers, serving clients with different philosophies and priorities. The challenge is not about finding the perfect way to charge, but about understanding which model is optimal for you, for each client and each brief.
We have gathered the top 10 most common ways agencies charge. They fall under three buckets:
- Time and material
To find the one that suits you best, there are six factors agencies needs to address thoroughly and honestly:
- Client needs: what they really want and value
- Activities, services and products: your offering
- Value attribution, such as what services can be valued
- Risk: a time when agencies and clients need to be brave
- Relationships: underscoring the importance of trust
- Commerciality: who owns pricing
We are extremely excited to have partnered with the IPA to publish The Price of Success.
Marc Nohr, chairman of the IPA commercial leadership group and Chief Executive of Fold7, explains: "The Price of Success defines the challenges, competitors, complexity and commercial reality facing businesses and gives agencies a wide range of tools to better reflect the value they generate for clients."
To find out exactly which models might work for you best, the full report is available for purchase from the IPA's website.
You can also sign up below to receive a preview from us.