“If you pay peanuts, you get monkeys.” The old cliché is often used to highlight that only good money attracts skilled or efficient workers. Although good talent today yearns for more than just competitive pay and solid salary structures, ad industry stakeholders and leaders would do well to remember this old adage in these times.
It’s no secret that the advertising industry is one of the worst paymasters. Long hours, demanding clients, bad bosses, no work-life balance, and light-weight paychecks at the end of the month – life in advertising is not rosy. There are many factors contributing to advertising’s reputation as one of the lowest-paying jobs. But it all starts with how advertising agencies get paid. It’s simple: If agencies aren’t paid properly for the work, the people who do the work don’t get what they deserve. The agency fee structure is broken, and it seems that no one really knows how to fix it.
Let’s break it down. Here are the ways agencies are paid today:
Good old retainership: Advertisers sign an agency for a relatively longer period of time, ranging from 3 to 5 years. This is typically billed monthly or quarterly at a flat rate.
Exclusive contracts: Often long-term agreements where agencies do not sign any competitor brand in a particular category where their client operates.
Project-based contracts: Advertisers sign an agency to work on a single project (could be a product/brand launch campaign or strategic promotions). It can last from 1 to 6 months.
How fee structure evolved
Traditionally, Indian agencies worked on a commission model under which advertisers would typically pay a 15 percent commission to network agencies on an account. This included 12 percent for media agencies and 3 percent for the creative agency. But the commission model had a meltdown by the mid 2000s as advertising began going through fundamental shifts beginning with a proliferation of new media.
As digital media platforms started taking over advertiser interest and media spends, advertisers realized that they needed specialized new-age ad shops that could solve their brand and business problems. This meant that advertising budgets will now be divided among multiple agencies. Therefore, new-age shops such as digital marketing, social media marketing, and content marketing firms started taking a chunk from the creative agency’s rather slim commission pie. It was then that creative agencies realized that earnings from retainership worked much better than fixed commission, which was anyway declining.
Today, very few agencies work on the traditional commission system.
What’s changing again?
Even the retainership model is taking a hit given the evolving brand needs. Advertisers are now willing to work with multiple agencies or new-age ad startups that could help them navigate the new media platforms. Often, such partnerships are based on small projects and deliver instant results.
With the fading away of the fixed payment model and the significant drop in retainership businesses, creative agencies are struggling to find ways to scale up.
On the other hand, most independent creative shops thrive on project-based work. If the work is digital-focused, performance-linked fees are also added to the contracts. This model works well for indie shops because their ambitions are different. Their focus is to attract bigger brands to their portfolio, build credibility, and create disruptive work to gain visibility. The price of these ambitions is that often these un-networked firms are also willing to accept a fee cut.
“Home-grown creative agencies have changed the remuneration dynamics for agencies from networks. They want to work with the best brands to build their portfolio and are okay with compromising on money at some levels. This affects the overall business,” rues a senior creative executive who spoke to Storyboard18 and shared his views on the condition of anonymity.
While small shops can afford to make compromises to attract bigger advertisers as clients and build their credibility in the industry, creative agencies from network companies tend to focus on expanding retainer businesses. Simply, because they have set targets to maintain a sustainable model to meet the high cost of operations.
Decoding current pricing structures
To be sure, there are currently no fixed fee structures in the creative agency business. The general formula is to determine the scope of work, the number of people required on the account, and overheads.
What’s unique to creative agencies is that many also add the cost of involving the top creative executive/s of the company. In many cases, the fee is then negotiated, and the number is derived after much compromise.
While making compromises, many agency CXOs don’t understand how this will affect their balance sheet at the end of the year, opines Kaustav Das, CEO of Bengaluru-based creative agency Ralph & Das. He believes CXOs should have an in-depth understanding of profit and loss (P&L) statements. Das also thinks it’s about time that agencies don’t mindlessly pitch without a service fee. He further says that some marketers are equally responsible for taking advantage of cutting corners and pocketing ideas for free.
Creative agencies also tried experimenting with a fixed fee model. However, fewer agencies adapted to it. Senior executives of creative agencies that Storyboard18 spoke to observed that the implementation of a fee system requires a fair degree of maturity and understanding of the agency business. Today, there is also a problem of plenty. From a consultant to a small shop to a boutique agency to a large firm (from a networked agency), they can offer the same kind of service and compete with each other.
Some marketers are equally responsible for taking advantage of cutting corners and pocketing ideas for free, Kaustav Das, CEO, Ralph & Das.
Bringing in exclusive deals, premium pricing
Chief executives of top creative agencies think it’s high time that advertisers consider only signing exclusive contracts at a premium price. What does this mean? In the case of networked agencies, advertisers sign exclusive contracts where the agency is barred from working on any competing brands in that category. However, there are chances that the network agency might be servicing a competing brand through its other subsidiaries.
For instance, if an FMCG giant signs a creative agency on an exclusive contract with an ad network, they can push the network to stop servicing any of the competing brands in the category even outside their creative division.
Some agencies tend to oblige, while others don’t.
Rana Barua, group CEO, Havas Group India clarifies that when agencies are signing the exclusive contract, they have to ensure that the client knows that exclusivity will be applicable only in the said vertical unless the client wishes to sign all verticals.
“For instance, a group operates different agencies under verticals such as creative, digital, design, etc. Clients have to be specific about the exclusivity clause, and it has to be specific to a function,” he adds.
Barua emphasizes that if a client is signing an exclusive contract, then the agency must ask for a premium because it helps agencies to hire and retain good quality talent that is needed to deliver consistent quality work on brands.
“The brand knowledge that agency folks (that work on a particular account) accumulate over the years also remains intact as they choose to work long-term on the brands staying at the same agency because they are paid well,” he explains.
The bottom-line
Jitender Dabas, COO, McCann Worldgroup India admits that driven by the urge to drive efficiencies, remuneration models have been moving to short-term non-committal arrangements from clients’ end. But he doesn’t think the client agency contracts (terms of relationships) have factored in the change of dynamics.
“There is a difference between exclusivity and conflict,” Dabas points out. “The conflicts can be managed by having different structures within an agency, but exclusivity has to be bought.”
Our ability to attract top-tier talent has progressively diminished as we aren’t a financially rewarding career to young people anymore, and it is all linked to what we are able to charge for what we do,” Jitender Dabas, COO, McCann Worldgroup India.
With exclusivity comes the opportunity cost for the agency of not working with someone else. The agency should be charging for that, and the clients should ethically be willing to pay the premium for exclusivity, Dabas tells us.
Way forward
According to Dabas, it’s up to the collective leadership of the industry to fight for the newer definitions of conflicts and exclusivity and the financial terms governing them.
“Like any other industry sector, it is the big agencies that will have to come together and fight for the rightful pricing and changes we seek. If we don’t, the long-term adverse effects are visible now. Our ability to attract top-tier talent has progressively diminished as we aren’t a financially rewarding career to young people anymore, and it is all linked to what we are able to charge for what we do,” he rues.
Dabas also feels that poor pricing is bound to impact the end consumer as well.
Without mincing words he says, “It will always, without fail, result in poor product quality as the manufacturers will resort to cutting costs to survive. The marketers must realize this every time they try to hammer the price down via their procurement.”