We are all aware of the direction the world wide economy is heading. But in the past two months it appears that agency fees are going the same way during the pitch process. But the same cannot be said for agency fees when discussing the negotiations with an incumbent agency.
It appears in their desire to win, or some may say buy, business, some agencies are slashing their overheads in their retainer proposals and offering key senior staff for free to make their remuneration proposals more desirable.
But when the same agencies come to renegotiating their fees with an existing client they scream “blue murder” when it is suggested they could look at any change but an increase to their existing fee structure.
Are they that secure in the relationship that they think that in these difficult times, their existing client would not put the business out to pitch?
A recent example saw an agency arguing that their cost base had increased faster than salaries and so their overhead factor needed to increase. Yet only 2 months earlier when the same agency was competing for another piece of similar sized business they proposed an overhead fee that was a fraction of their standard rate.
The problem with this is their existing clients end up subsidising the heavy discounting they are offering potential new clients. The more new business the agency wins with this discounting strategy, the more pressure there is to maintain the higher overheads and retainer rates with their existing clients to maintain their margins and profitability.
Now commercial confidentiality means that we are unable to inform the incumbent advertisers of their agency’s discount practices. But it is certainly awkward for the agency CFO to sit opposite us at the negotiation table and try to maintain a straight face on overheads and salaries, when we both know how much they are willing to give away if this was a pitch.
Agencies should be careful. This type of discounting devalues the services provided by the agency and the people who work there. But ultimately, the real risk is clients will start to think that the only way to get a great deal is to take the business to pitch each year, as they often do in China, to get lower and lower agency costs.