Price premiums are the ultimate measure of successful professional relationships. Holding Companies have failed to achieve them

Source: Farmer & Company Client Data.

A decline in price of -4% per year for 33 years — from $435,000 to $110,000 — sees a 75% reduction in real prices for Madison Avenue. That’s what this price curve shows for creative agencies.

Price of agency work, as indicated here, is like “price per kilo” for scopes of work, not “price per deliverable.”

The “kilo” is the “ScopeMetric® Unit,” where one ScopeMetric® Unit is about the size of a typical TV spot, and an ad banner is about 1/135th of this size. Every deliverable in a creative scope of work has a unique ScopeMetric® Unit (SMU) value in the ScopeMetric® system. (There are about 4,000 deliverables with SMU values in the ScopeMetric® Unit database).

What drives Madison Avenue’s price decline?

• The absolute growth of creative workloads over the years, driven by Marketing, and accepted by agencies, and
• The much slower growth rate of fees, driven by Procurement and accepted by agencies.

The fact that agencies do not document or measure their workloads for fee-negotiation purposes is the “original sin” that creates this problem.

Agencies accept fee levels that are completely unrelated to the amount of work they are doing. Can you believe this? “How much work are we doing? What kind of work?” are Management 101 questions.

Can you imagine Apple not knowing how many iPhones it produces? Can you imagine GM, Ford, Toyota, Nissan or any other automotive company not knowing the number and type of vehicles they produce every year?

In my many decades of corporate and advertising agency consulting, I have encountered only one industry that did not know the quantity and nature of its outputs.

The ad agency industry.

John Wren and Cindy Rose, of Omnicom and WPP, respectively, would have a hard time knowing what kind of work Omnicom Advertising Group and WPP Creative are carrying out for their clients.

They probably cannot get answers for the following questions:

• Are we doing the right work to drive brand growth for clients?
• What standards should we apply to govern the type of work we do?
• When can we cease doing “only what the client wants done,” without regard for whether or not it is the “right work” for the brands?
• Shouldn’t we have an opinion about this?

Since 40 out of 60 major advertisers have grown meagerly for the past 15 years, with product growth rates below GDP growth, agency media and creative scopes of work must be ineffective.

Ineffective scopes of work lead to ineffective agencies who are paid badly by their clients…and fired all too frequently.

Historically, creative agencies have been paid roughly 2.2x the cost of the people assigned to client accounts. Today, the situation is even worse. Some holding companies are “giving away the creative” in order to do principal media trading. They value the creative outputs at zero. (Unfortunately, this valuation might be right!)

Management consulting firms, by contrast, have traditionally been paid 5x to 6x the cost of their more expensive people. Additionally, consulting firms have grown at an extraordinary rate for more than 40 years, in contrast with agencies, whose growth rates are falling out of bed.

Does anyone need more information than this to conclude that agencies are adding little value…and that the consulting firms are adding value?

Can Madison Avenue be turned around?

Of course. Agencies need to reposition themselves as follows:

1. We are committed to a new strategic mission: to help our clients grow again.
2. We will analyze and understand the reasons for the slowdown in brand growth rates since 2009.
   1. Slowdown in new product development and launching;
   2. Competition from “private label” products at major retailers (Costco, Target, supermarkets, etc.);
   3. Change in demographics of our customers, from Baby Boomers to Millennials and Gen Z’s; and
   4. The overuse of promotional advertising (i.e., programmatic) at the expense of brand-building advertising.

These are formidable problems, but they can be overcome.

Agencies need to be more “creative” in solving these problems. Cranking out videos that “go viral” is not the solution. Pursuing awards is not the solution. Spending money on Superbowl ads is not the solution.

Agencies need to be smarter about the nature of media and creative scopes of work, recommending SOWs “that work” rather than merely accepting what the client wants done.

Consultants often “push back” on client briefs; agencies need to do the same thing.

Is there any leadership for this at the holding companies? Within their agencies?

If so, it isn’t very visible. What we learn is that Omnicom will increase its cost-reduction target to $1.5 billion rather than $1 billion, which will only increase its understaffing problem and put more pressure on today’s creatives.

And WPP? It’s taking big write-offs and doing some opaque reorganizing.

Until agencies get back in the performance-improvement game for their clients, they will continue to suffer from price declines for their work.

This, of course, will lead to more downsizings and agency mergers, which are disruptive and do not solve the basic problem.

• AGENCIES HAVE A VALUE-ADDED PROBLEM.
• AGENCIES ARE NOT SOLVING CLIENT BRAND PROBLEMS.
• AGENCIES WILL CONTINUE TO SUFFER THE CONSEQUENCES UNTIL THEY BECOME MORE STRATEGICALLY USEFUL.

Price premiums are the ultimate measure of professional relationship success. It’s time for agencies to commit themselves to earning price premiums by doing effective work that drives improved client performance.