Why marketers should stop paying agencies for ideas

This post is by Darren Woolley, Founder of TrinityP3With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

As more people are jumping on the bandwagon and declaring the current agency remuneration model broken, there are those who are still suggesting that agencies should be paid for their ideas. The problem is that in most cases they want to be paid for these ideas upfront and mostly offer no solution to the issue of valuing the idea beyond the current cost based system.

The fact is that marketers should not pay agencies for ideas and here is why:

1. Agencies have been happy to give their ideas away for free

I have spoken about this previously at The Caxtons and in AdNews. Agencies began giving creative ideas away as part of selling media. Later creative was incorporated into the media commission with service fee. Then with the dismantling of accreditation and the split of media and creative, the creative agencies adopted a cost based system.

But irrespective of the method of remuneration, only about one percent of the advertisers budget is actually spent on creative concepts and idea creation. (This represents about 15% – 20% of a creative agency retainer and less than 10% of the creative agency billing) The fact is that marketers have never had to pay any significant amount for ideas in the past, so why should they now?

Advertising_Ideas_Worthless2. Ideas are a dime a dozen

How many ideas do you have a day?

As a creative, paid to come up with ideas, you could have a hundred ideas a day. But most of them can be worthless or just plain stupid. If you look at the movie industry, for every one thousand movie ideas, if one hundred get written only ten may ever get made and perhaps one will be a hit.

The same with advertising ideas. Not every idea is a hit, no matter what the creative who developed it will tell you. You could pay for ideas and get less than 0.1% hit rate. (Ten times worse odds than paying your creative agency retainer). The saying that ‘ideas are a dime a dozen’ is a fact. So does that mean advertisers should pay less than a cent per idea?

3. Ideas are worthless until someone is willing to invest in them

The fact that an advertiser is paying an agency to come up with ideas does not mean that they believe the ideas created have value. After all, it is highly likely that the advertiser is not paying for the ideas but the resources that are engaged to develop the ideas. They are not investing in the ideas per se, but in the people.

As such it is perfectly reasonable for the marketer as the buyer to set the price of the concept development and the agency to accept it. And on the basis that the ideas are highly likely to have no intrinsic value, it is smart business to pay the lowest possible price for those ideas as a way of mitigating the risk of failure. Think of most other areas of commercial creativity such as novelists, composers and artists. In each case they are rewarded for the value that they create through sales, downloads or licensing.

4. Most advertising ideas are actually novelty and not innovation

The biggest issue is defining what is required of the idea. Words such as creativity and innovation get bandied about the industry, but the truth is in most cases all that the agency is required to produce is novelty, which is as transient as tomorrow’s new fashion. While you will accept that screen writing is a creative process, there are screen plays which are innovative and those that are simply novel.

By way of example, the latest instalment of the Die Hard franchise, ‘A good day to die’ is simply a novel interpretation of an existing concept. It is derivative and yet novel in execution. But certainly not innovative. But then again how many advertising concepts are simply derivative and novel, rather than representing in their category or the industry? So much of the creative advertising that fills our screens, browsers, airwaves and print is nothing more than novelty. The problem with novelty is that is largely based on fashion and interest wanes quickly with little residual value created.

What marketers should value

Consider the fact that marketers currently pay around one percent of their advertising and promotion budget on concept development and creativity. That means they are spending 99% on implementation and administration. So with very little risk to the agencies financial performance, you could stop paying agencies for ideas. This would be a simple 1% drop in total agency spend. And start paying agencies for the value created by their ideas.

Of course agencies will argue that they cannot influence all aspects of the sales and marketing mix, but if the big idea is as powerful as marketers and agencies make out and if the purpose of advertising ideas is to change consumer behaviour in a positive way, then why wouldn’t agencies and marketers be willing to put 1% of the A&P budget at risk?

Now I know that people will raise the usual issues about control and determining cause and effect, but I am talking about putting less than 10% of the creative agency billing at risk. Most offer this risk factor as part of a largely flawed performance based remuneration model. So rather then dragging up the same tired old hurdles to innovation in agency remuneration, what do you think of this idea?

Let me know by leaving a comment here.

Related Posts Plugin for WordPress, Blogger...

About Darren Woolley

Darren is called a Pitch Doctor, Negotiator, Problem Solver, Founder & Global CEO of TrinityP3 - Strategic Marketing Management Consultants and a founding member of the Marketing FIRST Forum. He is also an Ex-scientist, Ex-Creative Director and a father of three. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com
This entry was posted in agency remuneration / compensation, agency search & selection, agency solutions, industry news & trends, interesting observations, marketing procurement and tagged , , , , , , , , , . Bookmark the permalink.

17 Responses to Why marketers should stop paying agencies for ideas

  1. Arun Mistry says:

    Stirred the pot nicely Darren…again. As the landscape fragments more and more there is still a need for the big idea that translate across media and hence is worth paying for. However, how that payment should occur and how much could be tied to performance of the idea in moving the right dials for the marketer's brand. Pay for performance we have discussed here before and if agencies are bold enough then brands should give agencies a seat at the top table. True business partnership where all have a vested interest in success and rewarded accordingly. And in failure share the risk. That certainly moves away from the cost recovery model that has been operating for so long.

    • TrinityP3 says:

      I agree Arun. What I disagree with is those in agencies who want their cost recovery model PLUS a fee for simply coming up with an idea – BIG or not. This is the having the cake and eating it too. Time and again, agencies have said to me that they think they should be paid for ideas. I suggest they should be paid for the value of the idea, and at the time of being presented that is ZERO! With time it may or may not yield value for the marketer. But most agencies are not willing to take that risk, saying that there are many factors affecting value realisation, such as economy, competitive market, etc. But these are the same risks the marketers are facing. I think we fundamentally agree Arun, I have just as you say in your opening line, stirred the pot.

  2. Anne Miles says:

    What does everyone think of a concept rollover fee? So, if the costs of the creation of the idea is paid for as part of a production budget, and if the work does well that there is some kind of royalty paid for it (possibly greater than the hourly fees), going to new markets, to additional deliverables, and/or an extended time frame?

    I'm just wondering about applying some principles from talent and music creation to idea creation. I'm thinking about this model for work that we create for clients. Since I have a production based business and creative is done through the production pipeline as a whole new way of working it would be quite a sound concept for my model.

    What are your thoughts?

    • TrinityP3 says:

      It is an interesting idea Anne. The problem is that agencies are offering this service currently without rollover. What are they willing to give up to get the rollover. Because this is exactly my point. It seems to me in this conversation agencies want their cake and eat it too. First they want to get paid for the hours it takes to come up with the idea and then they want a fee for the idea and then they want a bonus on top. Win Win for the agency. If a commission an artist to paint a portrait we negotiate a fee up front for me to own the portrait. If I sell it for more than I paid for it that is my benefit. The artist does not come wanting a share of the profit. This is the way agencies are paid now and what they want is to be paid for the profit or the rollover as well. My point is that creativity is currently about 1% of the total ad spend so why not NOT pay for the idea and then only pay a share of the profit or value? The trouble with the rollover is you get paid up front and paid over and over again.

  3. Andy Price says:

    Great debate. It’s one I have heard many times. Whilst I agree totally with the notion “paid for the value of the idea” I can’t help but feel that many clients don’t value the relationship. Too many Marketeers see Agencies as nothing more than suppliers where you buy your bolts or fish or plates from. They do not want, as Arun put it “a business partnership where both parties have a vested interest”. In my own experience the best client/agency relationships are open ones, where ideas are shared, where value is put on doing the right thing, are mutual, long term and respectful. One that are not this fail early. Equally, I know too many people in agency land that just want to do a few nice ideas or think nothing than just taking the money. So I suppose it comes down to a simple, old fashioned idea of people working with people they like. Simple relationships where trust and honesty prevail.

    • TrinityP3 says:

      Nice in theory Andy. There was a time and occasionally there still is a robust social contract between agencies and marketers based on relationship. This is a "I'll scratch your back if you scratch mine" arrangement, which is the past few years and with the increasing focus on accountability and the participation of procurement is now "you scratch my back and tell me how much it costs to do it so I can then either negotiate a lower rate or outsource it to India" arrangement. No matter now good the relationship the focus is now very much financial and the old days of the agency getting rich and fat on the advertisers media commission are over and simplicity is replaced with complexity, with more agencies competing with each other for the share of a diminishing marketing budget. Basically the question is are "good ol' days" desire for "Simple relationships where trust and honesty prevail" achievable in this current business environment?

  4. Anne Miles says:

    I too aspire to a strong relationship with clients where those lovely values of trust and respect are there, but at the end of the day both are businesses and there needs to be clear guidelines in place or someone gets abused.

    To clarify my thought – a rollover fee in my case was based on a slightly different model than Darren has discussed – head hours plus concept fee plus rollover.

    With talent fees and music rights there is one fee that is an accumulation of some exertion, and some rights but essentially musicians and talent's time to create the project usually outweighs the actual rights in the first instance (in most cases, except celebrities that is and voice overs). There wouldn't be a fee on top of this.

    When talent and music is rolled over or expands into other territories (therefore success based) then further fees are paid pro-rata to the agreed fee. These are based on no exertion only rolling over the original package fee. So, talent and musicians really make their cash on extensions and rollovers.

    The question then is what makes up the original project fee however – how much is 'time for money' (exertion) and how much is some kind of project fee (or is that just another way to say concept fee?). With talent and music it is generally closer to the exertion/costs than anything else – unless they nail it in record time and use synthesisers rather than an orchestra. This may ruffle feathers with creatives – just working on finding the sweet spot where everyone wins.

    • TrinityP3 says:

      Hi Anne, the idea has merit. My concern is it is a little like the reason agencies supported the media commission system. If the campaign was successful the client had more money and would spend it on media and the agency got the commission. The same here. The client extends the use and reach of the project and therefore the agency is paid a rollover fee. But it certainly has merit. We had a agency contract that did this, but in the end only managed to get three clients to embrace it. Their thinking for those that rejected the idea is "why should I pay for what they give me for free". Fair point.

      • IanMT says:

        I’ve used this before in commercials from the production side. In that case the agency (and by extension client) argument could have been “it doesn’t cost you any more to produce an ad that shows only in the UK than one that shows in the UK and North America (say)”. True – but it’s a very easily understood and applied form of payment by results. Ditto the use of limited license length.

  5. Anne Miles says:

    Thanks Darren. I think I'll give this a shot as i feel it is fair on both sides – the original use is pretty much time only without a separate concept fee, and extended use is equivalent to the original fee and about on par with having to re-write something new. Everyone wins. I'll let you know how it goes and any flaws in the system.

  6. Andy Bateman says:

    The issue here is risk and reward. If the agency takes no risk, then don’t expect much in reward; other than the time if your staff it took to do the work. If you want higher margins, then you’ll need some skin in the game. There are very few industries in which the service provider knows how much they are going to get paid a whole year in advance – guaranteed! And with no real independent metric of success or quality. And then they whine that they don’t make much money. Give me a break!

  7. Adam Ferrier says:

    I like the thought of having the financial conversation around the value created by the idea rather than the idea itself. Theoretically it's great, the issue is the value conversation happens after the idea is developed – sometimes 6 to 18 months even longer after the initial idea. To long to wait to get paid (for a great idea).

    Perhaps agencies should charge per idea, but they charge by the amount (or percentage of) of value created by the last idea they did?? Keeps everyone accountable.

  8. Geoff Ingall says:

    How does/should TrinityP3 charge its own clients? It steers clients towards its selected agencies; the agencies pitch, usually at their own cost; with the guidance of TrinityP3, the client appoints an agency; a new campaign is created, often at great expense; the work runs the work and – nothing. The campaign is a fizzer. Is TrinityP3 accountable? Should P3 receive their fee once the outcome is known?

    • TrinityP3 says:

      Hi Geoff. Thank you for giving us so much more credit than is a reality. We do not select agencies. We do not brief the agency. We do not develop the strategy. We do not approve the creative work. We do not execute the creative concept. And for each agency appointed and in any year the marketer and their agency will undertake many projects together. I am happy to be paid a performance bonus, especially on longevity. Suncorp creative with GPY&R more than eight years. Telstra media with OMD more than seven years. The list goes on. We do however Geoff, and this would be unusual for most agencies, provide a fixed fee upfront based on value and not head hours and work to deliver the outcome and the agreed task. Can you honestly say that the agencies you have worked with have done this? And besides I think you have missed the point. The article says don't pay head hours for ideas, pay for performance on the creative idea. Of the total agency fee the creative concept is typically less than 20% – about the same as your profit margin target.

  9. Ange says:

    Interesting thread. I'd have add that if the Agency is paid purely on the performance of the idea, then it would only be fair to request that the marketing team do not direct the creative (and dilute it). Thus if the idea failed – it would be entirely the agencies fault. – and their loss. All to often a great idea is made "safe" and "palatable", making it weak and unmemorable. The idea would also need to be researched by the agency (if they wish) not the client as research groups are like Juries (what types of people give up an hour of their time for a shopping voucher and pizza?)

    • Darren Woolley says:

      Or Ange, better still, would be to make the marketers also directly responsible for performance too. Rather than make the agency take all of the risk, we are saying make the agency share the risk and the reward of the idea. The agency gets paid to deliver the implementation, but ultimately implementation is pointless without an idea. And why pay for any idea, when you can paid for valuable ideas?

Comments are closed.