Charley Stoney.
Advertisers need to pay for agency services differently says Charley Stoney, President of VoxComm.
Agencies do great work. They help build brands and drive business growth.
But all those benefits are at risk because, while agencies are investing heavily in technology, producing more content faster and managing an ever-more complex landscape, their business model is being rapidly undermined.
The legacy payment structure for most is based on FTE and hours. AI undermines that because it reduces the number of staff needed and cuts the number of hours needed to execute a given task such as building a media schedule, for example.
If we want to retain the power of agencies, the brilliant insight and incisive consumer understanding that VoxComm members deliver every day, then we need to change that business model.
As agencies we’ve built a global business on the back of an essentially unscalable model. To increase revenue, agencies must increase headcount – a linear relationship that caps both growth and profitability.
Other categories are different. When we look at “Revenue per FTE” (full-time equivalent), at most agencies, the figure is roughly US$150,000. At most client companies, it’s often above $1 million. At Google, the revenue per FTE is $1.3 million. For Apple, its $2 million plus.
To change that model agency leaders need to get to work. They need to reframe the conversation so that it’s not about selling services and capabilities, but rather solutions to business problems.
The quickest place to make the switch is to focus on high-value areas that can be standardised, and where they have a track record and can demonstrate outcomes. These solutions can then be turned into fixed price products that advertisers can buy with confidence, knowing exactly what they are getting in return.
There are already great examples of agencies applying their innovative thinking to do just that. Our report Redesigning the Agency Value Model outlines a range of solution-based approaches including:
- Moving from staffing plans to modular solutions priced for impact;
- Turning expertise into repeatable AI-enabled solutions that scale; and
- Replacing projects with a subscription combining talent, technology, and outcomes.
There’s the example of a full-service agency with 105 employees and $20 million in revenue refocusing on a targeted set of client types and outcomes-based solutions. Codifying its expertise as repeatable offerings made the agency’s value clearer and easier for clients to buy. Clients responded by committing to more substantial relationships and expanding the scope of work as confidence in the agency’s impact grew.
Similarly, Australia’s Time Under Tension has built fixed-price offerings for organizations with uncertain needs by identifying recurring patterns and designed repeatable solutions that can engage clients before problems are fully defined, reducing delivery risk. The model is pushing expertise upstream, where value is highest and a recent survey of its top clients revealed a Net Promoter Score of 96.
On the other side of the coin, advertisers need to stop thinking of AI as a way to simply cut costs but rather a way to deliver greater, more effective impact. Moving to a products and performance model will help them gain a clearer understanding of what they are buying and why.
The truth is that many clients are already uneasy with time-based relationships because the return on their investment is hard to explain, defend and forecast. Productization will give them predictability of cost and accountability beyond activity tracking.
Of course there will have to be some delicate conversations, particularly with existing clients, but most will welcome the idea that compensation aligned with the outcomes agencies help create should become a much more central part of the relationship.
The key will be defining the metrics both sides use to define the desired outcomes and it also possible to transition clients gradually so they become more comfortable and confident in the output deal.
This switch simply has to happen. If you aren’t exploring outcome-based solutions as an agency, your profit margin will drop, and if you aren’t able to link marketing activity to business KPIs as a client, then you are going to struggle to secure the best external partners.