There’s lots of debate about how creative businesses get paid for their work. Those of us who have been around for a while will know this isn’t a new debate.
A quick history lesson is helpful. Throughout most of the 20th century advertising agencies earned their money from a fixed commission. The term agency is derived from the 19th century when intermediaries sat between the advertisers and the newspaper publishers, they acted as agents. The newspaper barons had rate cards for their space which was discounted by 15 per cent for agents who billed the clients the rate card (keeping the difference); all above board and transparent.
Whilst this was not a perfect system of remuneration it was at least clear. Also, it was the same for the good, the bad and the ugly.
This simple industry wide system went tits up in the 1980’s when media began the slow transition from being an in-house department in ad agencies to standalone independents. All of a sudden two different agencies were taking their cut of the 15 per cent and clients began to challenge this division of labour. The established system was breaking up which nobody was prepared for.
When Simons Palmer set up at the end of the 80’s we were either the first or second ad agency (HHCL may have been the first) to set up without media as part of the business. We had to figure out how to charge clients, without any guidance from anyone.
Our fear at the outset was two truths; nobody will have heard of us and nobody cares either.
The massive challenge was creating awareness of our fledgling agency, plus differentiating ourselves from the hundreds of agencies in our world.
We knew there would be a direct correlation between awareness and financial performance; we had to climb out of commodity land as fast as possible.
Our first serious challenge on fees was after winning the BT account. Robert Bean was our client and he told us BT didn’t want to work on commission – or fees! Carl Johnson and I scratched our heads and focused on the procurement folk at BT, recognising they worked with metrics such as miles of copper wire. We went back with a proposal that put a price on creating and producing advertising in different media channels, such as £150,000 for a TV commercial.
To be clear not the production cost, our income for doing the job. This was agreed and everyone was very happy as it was black and white. We were delighted because it removed any negotiation: you want three TV commercials, that’s £450,000 and thank you very much (we did do a discount for multiple executions).
The moral of this story is we did put a value on our time and expertise but it was contained within an overall costing of the complete exercise. For me it was a bit like buying a house. If you want a four bedroom house in Chelsea it will cost £m’s whereas you could buy the same size house in Peckham for a fraction of the Chelsea place. Demand is the driver of price and popular areas of London attract more people with the available dosh to live there. It becomes a self- perpetuating upward spiral.
Ad agencies are similar. There are premium sub sectors and commodity sectors, the latter being the majority. At the moment I would put adam&eveDDB (above) towards or at the top of the premium sector; clients want to be there. Demand, again, being the leverage on revenue. Price is secondary in this case whereas in the commodity sector price is likely to be the deciding factor.
So being wanted is a huge variable in revenue conversations. One of the tests is whether an agency is able to turn away potential clients (for whatever reason) against chasing every account on the loose.
It’s just like any brand challenge; the holistic appeal determines customer behaviour, pricing, market share, profit, recruitment, reputation and loyalty. Just like running any business for the boss of an agency.