WHY DISRUPT THE MODEL?
by Caroline Johnson, The Clear Partnership
The creative Agency model needs an overhaul.
Brands are taking matters into their own hands (and in-house), strategic consultancies are advancing, and Agency services are increasingly inefficient and inflexible. Agencies generate most of their revenue from selling their time – particularly in lower-value, commoditised services – which leaves no room for innovation or healthy margins. Time-based charging also makes it hard to monetise new and more efficient ways of working, as well as expensive senior talent. For the top 50 independent marketing groups in the UK, profit margins have decreased to a historic low of 7.5%. It is clear that the current industry model is no longer sustainable for Agencies. Change can only come by focusing on driving more value on both sides, and developing business models that focus on clients’ business challenges, putting Agencies and their Brands back into true commercial and strategic alignment.
WHAT WILL AGENCIES GAIN?
The current Agency model limits margins to less than 15%. By moving to more flexible and relevant pricing models, and by using purpose-built programmes and products and re-packaging capabilities behind client-facing propositions, Agencies can transition from a service-led model to an output/outcome, value-priced one.
In return for delivering more significant value to their clients, they can transform their net margins and GI per head.
Agencies will not only enjoy a boost in profits. By developing new marketing models in partnership with their clients, Agencies will have a better understanding of Brands’ needs, enabling them to improve the quality of the creative work they produce. Agencies can take advantage of the increased value they are providing by being more upfront and transparent about the margins they require in return. They can start to offer a range of value-based pricing strategies to suit the client, aligning their pricing to key outputs and commercial outcomes. With Brands increasingly on the lookout for partners that can offer more flexible commercial propositions and new ways of working, Agencies that are able to adapt will attract more business.
HOW TO THRIVE
It’s no secret that a shake-up is underway in the industry, and many Agencies are fully aware of the need to change. The challenge lies with knowing how to make the transition – and how to afford it – while maintaining the existing model until the new one can be commercially proven and rolled out. How do you rewire the house while the lights are still on? The answer is to implement a full and proven Business Model Change Programme that addresses ingrained behaviours, outdated costing processes and poorly supported negotiation tactics, and to stop selling and justifying long lists of services, people and hours. Agencies need to reimagine their business models so that they are fully client-led. The commercial proposition and business case on offer needs to be just as compelling and convincing as the Agency’s creative ideas. By building commercial capability, as well as pricing policies and business case expertise, Agencies are investing in a brighter and more profitable future.
BUT WHERE TO BEGIN?
- Any change programme must be led consistently from the top. Aligning senior teams around a shared vision of what both the short-term and long-term roadmaps to the future model look like.
- Empowering the leadership team and providing them with a new and comprehensive commercial toolkit, commercial language and re-packaged capability to help implement and sustain change is vital.
- Agencies need the ambition and confidence to create a new story and move beyond the limitations of their current model, driving innovation back up their agenda and applying creativity to how they approach commercial partnerships.
- Is it imperative that Agencies make their main clients part of their journey. This will result in better partnerships and a higher quality of work, which will drive value for both sides.
- Agencies should rely less on costing as a skill set, and move towards pricing as a core business function.
MAKING THE CHANGE