If you find yourself humming the tune to the Peter, Paul and Mary song – that is totally appropriate. That song was a poignant and aching mourning for a lost past. That melancholy sense captures the mood of the moment for agencies. They have been buffeted for decades by margin erosion that left them weaker and searching for a glorified, Mad Men past that seems gone forever. As a result, many people who work in the agency world are underpaid, overworked and have little “agency” over their own careers (pun intended).
Gone is the joy I encountered during my agency years, (https://trustwebtimes.com/the-joy-of-modern-marketing/).
Gone is the swagger and confidence that permeated the walls of agencies in years past.
Gone is the business model that fueled agencies’ extraordinary growth.
Gone is a vision for how agencies can get their groove back.
While agencies are great at analyzing client businesses, unfortunately, agencies are not as good at looking at their business so they can proactively craft a new vision appropriate to the times. More to the point, the story of agencies’ diminishing margins has been an under-the-radar tale for decades.
Decades of Diminishing Margins.
It’s tempting to think that AI is the big culprit in agencies’ margin hits. Not so. In fact, agencies have experienced decades of eroding margins going all the way back to the 1990’s.
1990’s:
Management consultants sliced off agencies high-margin “business planning” revenue. This was a bitter pill to swallow because agencies prided themselves on their strategic prowess. They believed this was what clients most prized. Yet management consultants and their “sexy” charts continued to make inroads in the pristine halls of marquis clients. The was a huge margin lose since these high-stakes projects were big billings opportunities for agencies.
Agencies’ response to this margin threat was to just lick their wounds. They changed nothing in their business model. Agency execs believed they were “safe” from management consultants’ incursions because they incorrectly assumed that since management consultants didn’t buy media and didn’t create ads – these business planning margin land grabs were one-offs. As we now know – that is not how it played out. Emboldened by their success, big management consulting firms like Deloitte created big marketing services business units that competed directly with agencies.
2000’s:
This was when agencies moved away from being accountable for a client’s full revenue goals and shifted to a model where they took responsibility for programs they implemented. Previously, agencies were on the line for a brand’s total performance – all in – like at P&G. The agencies that served any P&G brand, sat at the same “table” with their client partners during the daunting annual P&G brand reviews. P&G would assign ad budgets based on one metric – sales. Nothing else. Simple. Straightforward. Scary. Client product managers and their agencies won or lost the budget battles in unison.
Yet, agencies ran away from that outcome model as fast as their fees could carry them because they felt “vulnerable” being so “accountable.” After all, the argument went, agencies don’t control everything.
However, once agencies detached from a full outcome accountability business model as digital marketing emerged to be the dominant aspect of marketing, this was the moment agencies’ margins deteriorated again because clients became less loyal than ever. Ironically, while agencies felt too vulnerable to be accountable for a client’s full business, they set the stage for being even more vulnerable than ever because clients’ attachment to agencies weakened once agencies stepped back from being true business partners to clients.
2010’s:
This was the decade when adtech and social sliced away even more margin revenue from agencies.
Agencies largely ignored social and digital for a long time, thinking clients valued their strategic and creative contributions most highly. Another epic miscalculation.
Clients could buy social themselves and adtech sold directly to clients, bypassing agencies so adtech firms could channel a lot of margins their way as they stuffed adtech tax into every nook and cranny of the media buying process. By the time agencies became aware of their margin loss, the battle was largely over. Clients became attached to social media and the scale media buys adtech promised. Again, agencies lost a huge chunk of margin to social media platforms and adtech.
Believe it or not it, the margin loss got worse. As clients realized that all this tech came at a price – about 15 – 25% in adtech tax in addition to the agency fee of 15% to 20%, clients understood that, shockingly, media budgets had been slashed by 35% before any active media even made it into market. Clients response was to push agencies to reduce their media buying fee because clients did not trust agencies to be adtech experts (and in fairness, many were not).
This is why, in fact, clients sacrificed agency margins at the adtech altar.
A dismal situation indeed but the margin damage was not yet over. In a panicked response, large agencies went on a buying spree, snatching up adtech firms as fast as they could, presumably, to stem the margin bleed. Unfortunately, they acquired these companies at the height of their valuation despite the quickening devaluation of these adtech assets as trust issues around privacy, transparency, and fraud mounted. To add insult to injury, many agencies pushed clients to use these acquired technologies despite the growing disillusionment with adtech performance and accountability. Clients’ trust in their agencies plummeted in proportion to the underperformance of the agency’s adtech stack.
It turned out that buying adtech firms to shore up margin, ended up being another, impossibly huge margin drain.
2020’s:
AI erupted into everyone’s consciousness. Agencies, as always, reacted most predictably, at first dissing AI as never being as good as human talent especially in content creation. Unfortunately, within a few short years, AI creative capabilities exploded to encompass images and videos – the last bastion of agency margins. In the battle between AI and agencies’ margins for creative services – agencies were on the wrong side of that bet – again.
This time agencies’ response to the AI margin threat was predictably wrong-headed and misaimed. Instead of changing the business model, large agency mergers began to appear at a quickening pace. The thinking was that size delivered “efficiencies” which should drive up margins. This is not a new strategy and spoiler alert, the merger strategy NEVER worked. Not in the 1990s. Not now. Mark my words, what is likely to happen as has happened before, getting anything done will grind to a halt as people try to navigate an overly complex organizational structure.
The Future, Margin Rich Agency Business Model.
What is clear to me as an ex-agency person is that the agency’s business model started to implode 30 years but agencies put their head in the business model sand again and again again. Sadly, now many agencies are operating on fumes as AI sucks up the last of the margin oxygen left in the room.
The perverse plot twist to all this doom and gloom is that marketing as an industry is growing and will continue to grow as long as companies need to bring products to market.
Ironically, the need for agency work is growing NOT shrinking. In fact, I believe agencies are well positioned to thrive in an AI driven future BUT their business model and mindset MUST change.
Here’s where the new agency model is going – centered on trust but in an entirely new way.
- Operational trust so agencies can create/ manage adtech stacks for clients. Now clients often have a jumbled mess & agencies just work within these broken systems. If an agency becomes adops ninjas – clients will remain loyal for a very long time indeed.
- Aggressively adopt a mentality of media buying rightsizing so brand funds are not wasted on scale media buys that few real people will see or care about. Agencies should be willing to do the heavy lifting of direct media buys or sponsored content media even though programmatic is much less costly in terms of labor costs. This “rightsizing” activity will earn clients’ trust because they will highly value media buys that are well-crafted to drive revenue not just behaviors like clicks.
- Strategy services are the cost of entry – not a margin profit center anymore. Instead, focus on acquisition marketing using technology and data. Clients need to trust that agencies understand how to drive outcomes predictably and profitably.
- ROI trust that the investment made in the agency can be understood in financial terms. Too often, agencies don’t help CMOs craft the ROI story for the C Suite. Agencies tend to highlight the brilliant ads they produced or the newest social meme campaign. This does not build the trust story the CMO needs to explain that they are a responsible custodian of the company marketing funds.
- Deploy or acquire proprietary tech brands can trust to do something that is unique in the business of generating revenue and sales. Every agency needs a superpower that can differentiate itself from the pack. Without it, clients will chase the next agency that can tell a sexier story. Clients will trust the agencies that can demonstrate the, “where’s the beef” promise. Fluffery is a margin killer – every time – all the time.
- Attribution/ analytics trust so agencies’ activities can be linked to outcomes that are recognizable. Some agencies understand by taking full ownership of marketing attribution, including activities the agency did not implement, they will make the agency indispensable as a trusted partner to clients.
Agencies Must Lean Into The Concept They Are In Business To Build Revenue For Brands.
Agencies are not in the creative business – even creative agencies.
Agencies are not in the media buying business – even media buying agencies.
Agencies are not in the strategy business – even those agency folks with British accents (kidding not kidding).
In the past, agencies relied too heavily on their value proposition centered around brand value or brand positioning. That was always a tenuous business model through the decades and more so as tech became more dominant in marketing. As agencies became more commoditized, they became less trusted and more vulnerable to diminishing margins.
Going forward, the agency business model clients will value is the model where the brand can trust that the agency is entirely accountable for how well a business does – across the entire business. This notion worked for brands like P&G which explains why P&G was so loyal to its agencies for so long in the 2000s.
To get to this new agency business model, it is necessary to transition an agency’s mindset from a “marketing services” model to a “tech acquisition services” model that can power the brand’s marketing investment credibly.
This is where the most acute pain rests with clients.
This is exactly where agencies can thrive.
If you wonder if this is possible – the answer is yes. Our tech/ marketing services firm is punching way above our weight, beating traditional agencies all the time. Our client retention rate is the envy of any services firm – large or small. If we can do it, rest assured my friends, so can you.
