Silent Killer: Undercutting Agency Fees

04 Sep,2014

By Shephali Bhatt

 

What used to be an alarming event two decades ago, has become a routine affair in the agency business now and it’s nothing to be proud of, dear agency folk. You pitch for a client. Agree to work on a price significantly lower than the previous agency.

 

 

Agency Rate Card

Havas’s Satbir Singh points out how advertising’s allied industries that comprise of filmmakers, music directors and photographers have their unions and guilds that have their rules regarding pricing that no client fl outs lest he be blacklisted.

 

So, it’s not that the client is unruly. Only the agency bodies have remained toothless all this while.

 

What does it take for all the luminaries who keep clinking beer and rum glasses at every other industry event to come together and sort this issue once and for all? Why can’t ad agencies have a rate card for basic creative service, advanced offerings, category wise rates et al? File under: easier said than done.

 

Contract Killer

Of the agencies accused of undercutting, Contract tops the list. Its admittedly impressive new business track record is said to be because of its ability to go lower than the already low prevailing industry standards. Genuine complaint or a large industry wide case of sour grapes?

 

Rana Barua, the agency’s CEO, finds the conjectures funny: “We’ve won around 19-20 businesses since I came on board. There have been hires at senior levels from reputed agencies. You can’t sustain such a model at a reduced cost. Not if you’re running a WPP agency. If only money was the deciding factor, pitches would’ve been done over phone calls. It’s the work that differentiates you from the rest.”

 

As for the competition: they are banking on a situation where the axe falls once WPP’s global bean counters discover the agency’s margins are not up to scratch. Except by then, they fear, the low rates allegedly offered by the agency may well have become the new normal.

 

Source:The Economic Times

Copyright © 2014, Bennett, Coleman & Co. Ltd. All Rights Reserved

Licensed to republish

 

Sometimes significantly lower than what’s required to run the business well. Soon, the good talent makes tracks out of the agency. Mediocre talent is shipped in and results in average to bad work, and ultimately an unhappy client who opts for a pitch. Lather, rinse, repeat. There was a time when agencies would get a 15 per cent commission of the total marketing budget.

 

The split between the creative and media units was the beginning of the end of that model. Clients started negotiating the agency fee. For some agencies, it’s down to an abysmal 2 per cent-3 per cent now. The Tata Docomo account was moved at almost one-third the price from FCB Ulka to Contract, says the grapevine.

 

Another overheard titbit suggests that the Uninor telecom account went from Leo Burnett to Bates CHI & Partners at one-sixth the fee. From Rs 80 lakh to Rs 20 lakh/year, if we were to believe the ad chat mongers.

 

It’s ironic how both media and advertising spends continue to grow year-on-year but agency fees continue to diminish. In the rush to report an account win, agencies often forget that while news in trade media is good to keep one in the industry’s memory for a brief while, it doesn’t ensure profitability – both in the short and the long run.

 

“It’s a self-defeating exercise once you realise it’ll take forever to reach last year’s fee level,” rues Satbir Singh, managing partner and CCO of Havas Worldwide, India. Undercutting also rings a death knell for agency’s favourite culprit for everything that’s wrong. Yes, the client.

 

Sunil Kataria, COO -sales, marketing and SAARC at Godrej Consumer Products, explains: Say you’re paying an agency a retainer of Rs 1.5 crore per annum. A good campaign that’s to run for 45 days will cost you about Rs 5 crore (because good creative costs money). If the agency goofs up, the loss to you is bigger than what you’re paying them over three years. And then shifting agencies is another critical decision for the client, he states.

 

You never know whether the new shop will understand your brand that well or whether you’d have the time and bandwidth to take them through the brand journey again. It’s a lose-lose situation for both the client and the agency, says Ravi Deshpande, who’s recently turned an entrepreneur with Whyness Worldwide.

 

While trying to hold his own against ridiculous price demands, he admits there were situations during his days at Contract when they had to accept businesses at not so justifiable rates. It wasn’t a ridiculously low price though, he adds. But large agencies claim they are compelled to work on incomes they’d principally be opposed to purely because there are too many small shops willing to work on those terms.

 

Not necessarily, retorts Kurien Mathews, chairman and founder of Metal Communications (an independent agency). “The indies that undercut, never grow too big and remain staffed by the founders plus a few very junior people -and there are many of them around.”

 

They don’t necessarily affect the business, he says, adding there are enough clients who want to pay for demonstrable creative value. Also, to the argument that network agencies have more overheads than indies, Mr Kataria asserts that the clients pay the amount required to service a brand. He pays for a team; not the entire agency.

 

A marketer has to justify his numbers to his CEO. It’s in his nature to negotiate numbers with you, the Agency. You need to figure out a way to professionally and methodically explain how you arrive at a price point and why it makes sense for him to bet his money on it.

 

“We give a large amount of our time for very little money. Which is why we aren’t able to invest in better people and tech,” laments Mr Deshpande. There was a time when students from IIMs wanted to join the likes of HTA (now JWT) and Lintas (now Lowe Lintas).

 

Now, even the MICAns prefer brand management to advertising, says Sandip Tarkas, president – consumer strategy at Future Group. In a scenario where there are specialists for every service, undercutting only weakens the position of the mainline agency.

 

You are the people who build brands. At least value yourself right, so the world can give you the respect that’s duly yours. Or failing that, enough money to keep yourself in the black.

 

Source:The Economic Times

Copyright © 2014, Bennett, Coleman & Co. Ltd. All Rights Reserved

Licensed to republish

 

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