Does The Agency Business Model Need Updating?
The last several years have been rough in agency-land. After the Holding Company consolidation of a decade ago investors and agency execs assumed their business would thrive through a combination of cost efficiencies and skill aggregation. But the fruits of consolidation haven’t paid off, and now agencies are facing the reality that they need to adapt in order to survive.
The core of the problem is that the agency business model hasn’t changed in decades, yet the work clients are asking for is transforming. The agency legacy fee model usually falls into one of two buckets. Either a Retainer model where an agency charges a fixed amount based on man hours needed to do clients’ work, or a Commission model which allows agencies to make up to a 15% margin on media bought for their clients. While agencies flourished under either of these models for decades, the game is now changing.
As described by Digiday, more and more clients are piecemealing out their marketing work to multiple agencies on a per project basis, and demanding lower profit mark-ups on the work being done. This leaves agencies with less overall revenue coming in and a choppiness to their billings which makes it hard to staff for. In addition, clients are more likely than ever to put their agencies into review which accelerates AOR churn. All of this is wreaking havoc on the top line rev of agencies and their HoCo owners.
So what can agencies do about this? Simply put, embrace the trend of project work. Become more nimble with a smaller core staff, be willing to staff up with freelancers as projects come in, and be ok with shorter-term assignments than years-long AOR representation. In simplest terms – don’t try to fight the flow of the business river, turn around and start swimming downstream with the needs of your customers.