This post is by Darren Woolley, Founder of TrinityP3. With 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.
Henry Miller said “One’s destination is never a place, but a new way of seeing things”. It is true, because as I travel on business and pleasure there are constantly new ways of seeing the world and new insights into the way it works.
Take my first trip to Beijing, China. It was on this trip that I decided to organise a tour of this historic city and in my tour guide I not only found a fundamental understanding of the value transaction hidden in so many commercial arrangements, I also found my wife and partner.
The fact is that often the cost of the commercial arrangement we make is not as transparent as we may assume. Yet, whether we like it or not they impact the value we obtain from those relationships, be it a tour guide or an advertising or media agency.
The road to Beijing
Now I have been to Shanghai, Shenzhen and Hong Kong many times, but it was my first trip to Beijing and one I found myself taking to attend the World Federation of Advertisers conference there about five years ago.
We were sponsoring the event and so I was heading to China’s capital, finding myself with 3 days free prior to the start of the conference. I try to include some free days when I travel as all work and no play, etc.
I decided to call my TrinityP3 colleague in Hong Kong at the time and ask for a recommendation on tours I should take and they enthusiastically said they knew a great travel agent in Beijing and would organise everything. Little did I know that they had told the travel agent I was the “Big Boss” and would require the full VIP treatment.
The travel agent contacted me and apologised that they were unable to take me personally on the tour as they were travelling overseas with a large group, but that they had organised their best English-speaking guide for my tour.
I explained that I wanted to see not only the main tourist sites, such as the Forbidden City, Summer Palace and the Great Wall, but I also wanted to experience the local art and culture of Beijing.
The three-day tour for one was planned with a driver and tour guide organised to meet me at my hotel the day after I arrived.
The Beijing Tour
The tour guide, the car and the schedule looked good and we started out doing the rounds of the list of places one should see on their first trip to Beijing. But talking with my tour guide, I was explaining that I also wanted to experience the things that a Beijing local would do, that perhaps a tourist would not know about.
I also wanted to go to the 798 Art Zone, located in the Dashzanzi, Chaoyang District of Beijing.
Looking at the schedule, my tour guide managed to reorganise the three days into two, which made time for a day to do the more local and cultural things I wanted.
But I noticed that between the tourist destinations on the two days there were a lot of “shopping opportunities” including a Silk Factory, Jade Factory, Pearl Factory, Tea Ceremony at a Tea Shop and a Cloisonné factory.
Shopping, especially for a range of tourist trinkets was not high on my priority list but I was assured that it was interesting and that I was not expected to buy anything, just come and see what they did.
I had been down this path before in India and knew the hard sell was coming. Besides I was more interested in seeing and experiencing the history and the culture of Beijing rather then spending my time in retail factories.
After the first couple of shopping opportunities it became clear this was not the cultural experience it was promoted to be and I was increasingly keen on dropping the rest so I would have more time to go sightseeing.
It was then that the truth came out that while I had paid for the tour, the travel agent kept most of the fee I had paid and that both the tour guide and the driver would get paid from any tip I paid and commission on any shopping I did, with commissions of up to 60% or more on what I paid.
This is not a fact that is often shared and yet I think most people who travel have an inkling of how this works. After all we know that you get what you pay for, but what happens when the expectations of the buyer are very different from the expectations of the seller because of miscommunication?
In this case there was a decreased delivery of value to expectation. Too much time potentially focused on shopping and too little time on the experiences I thought I was paying for. But through open and honest communication we were able to renegotiate the agreement to get what I wanted and make sure the selling was suitably compensated.
But what if this was about the commercial arrangements between an advertiser and their agency or agencies?
Where the selling sets a price that is too low
This is often the situation where the agency has taken a strategy of competing on price to win the business or procurement has been particularly effective at reducing the agencies fees.
In my case the fee paid to the tour guide and the driver were much lower than I understood and therefore they adopted strategies to increase revenue that included reducing the value of my tour experience. All designed to yield greater revenue for them.
The same applies to agencies who will look to achieve increased revenue from other sources. As we have seen in the K2 Report for the ANA, media agencies have leveraged the advertisers’ media investment to obtain rebates, commissions and kick-backs from the media owners.
Creative agencies have increased the range of production services they offer to maximise their retention of advertiser budget at greater margins than their base retainer or fee agreement. In one case we had the agency making a more than ten fold greater profit on advertising production than they made on their retainer, which was largely a break-even proposition.
In each of these cases the advertiser, as the buyer, is in the same situation I was facing with the Beijing tour. Pay more for the purchases on offer than the market dictates and experience deceased value or enjoyment from the tour, without any real understanding of the underlying cause.
Where the selling enters into third party agreements
The tour guide and the driver had entered into third party agreements with the owners of the shopping factories by way of an incentive to have potential customers come and shop there.
The fee paid to the tour guide and driver was funded through higher margins on the items on offer than was the market norm. But it is assumed that as the client would be a tourist then they would have little or no reference price to benchmark the items for sale.
The same types of arrangements exist between agencies and entities that can be both related to and independent of the agency. The most high profile example in the industry at the moment is the relationship between the media agency and the programmatic trading desk.
In many cases the media agency enters into an agreement of commercial terms with the programmatic trading desk on behalf of the advertiser. Legally this is an interesting situation, because the media agency is a contractor, instead of it being a principal / agent agreement.
The reason is that contractors are typically not allowed to enter into third party agreements on behalf of their clients without written permission. But even then, it can be difficult to undertake an audit of a relationship where the advertiser has no legal contract in place.
Where the selling is subcontracting services on your behalf
Most interesting for me is the fact that I had engaged the travel agent to organise the tour for me and they effectively failed to deliver. Firstly, they did not design a tour specifically to my instructed needs.
Secondly, they subcontracted the delivery of the tour to independent subcontractors in the form of the tour guide and the driver who were required to make their fee out of sales commissions and fees based on sales at pre-selected retail factories.
Yet this arrangement was never declared to me the buyer.
This is the same way agencies, media, creative and digital, engage third party suppliers to provide those services.
This could be anything from production companies to shoot that TVC, or post-production services or casting services. There is still a large number of advertisers who allow their design studios and agencies to manage and contract their printing and mail house services and the like, including commissions.
In most of these cases the agency rarely declares the financial arrangement in place, just as the tour guide was incredibly hesitant in declaring their commercial arrangements in place with the retail factories. They are rarely caught out as few advertisers and marketers have enough details on the industry costs and benchmarks to be able to challenge the arrangements.
How to know if your agency is acting as a Beijing tour guide
A great starting point is simply common sense. It the deal looks too good to be true then it probably is. I had a media agency offer to provide media planning and buying services for a financial services client for free and the advertiser thought this was simply a great deal.
Next, you need to be incredibly rigorous in relation to contracting and compliance with agencies and their subcontractors. In the case of trading desks, it is now considered standard for all agency partners and all of the major suppliers to the agency to be contracted directly with the advertiser.
Benchmarking and financial auditing are important tools and strategies for ensuring compliance to the contract agreement and to assist in detecting where expectations and costs are misaligned.
In the case of benchmarking we have identified agency remuneration which is so low against benchmark it is indicative of a relationship where the agency is definitely generating income and revenue from third party sources.
Finally, it is important to develop open, honest and frank relationships with the agency. Rather then simply focusing on cost, focus on the value the relationship is delivering and look to develop ways to measure and monitor the delivery of that value.
In my case I identified that the tour guide was willing to accommodate my needs in regards to the composition of the schedule and discussions led to disclosure on the shopping fees.
This built trust, which ultimately led to a relationship and marriage. While I am not suggesting you consider marrying your agency or agencies, it just shows what some honest communication can achieve.
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