How do you calculate or assess the value of your marketing spend?
In the past three years we have had a large number of projects designed to achieve just that – a fact based assessment of the value of the marketing spend. Specifically marketing communications or advertising and largely focusing on spend with external agencies and suppliers.
Now you would think this is something that almost any advertiser could do themselves. Why would you need to engage an external consultant to assess the value of your agencies and marketing suppliers? But the truth is that most companies and organisations do not have the data or the methodologies to provide an account of the value of their marketing agency spend.
Here is why:
Accounting systems collect spend only
That is right. The accounting system of almost all organisations can tell you to the nearest cent, rupee, baht, yuan, yen what was spent. If the spend was coded correctly they may even be able to tell you what was spent on marketing and even perhaps who was the supplier and in what period of the year it was paid.
But there is no accounting system that also captures what that spend purchased or what was delivered in exchange for that payment.
Sure it may tell you that the media agency was paid $27,459,875.42 in the 365 days to December 31, 2017. If you are lucky and the spend was coded correctly it may even tell you that $1,372,993.75 was paid as agency fees and the balance is then assumed to be media spend. But was it for media? And if so what type and quantity of media was purchased?
This is assuming that the marketing spend is correctly coded. What happens when the spend is incorrectly coded and no marketing spend ends up in marketing or marketing spend ends up in non-marketing budgets?
It is an issue we regularly find, no matter how much we are told that their accounts are in good shape, the spend data rarely is and the depth of information is limited by the universal limitations of the accounting system.
Often clients will tell us that they will undertake the data collection to reduce the project timeline and fee, which invariably leads to more work and taking more time because the data provided is indecipherable and largely worthless.
Supplier and agency contracts are rarely up-to-date
Another source of data and information on the agency and supplier value should be the contract that defines the terms and conditions of the commercial and legal relationship between the client and the supplier.
Over recent years these contracts have become longer and more complex as companies include sections on everything from gender diversity policy to data security compliance and environmental sustainability guidelines to meet the expectations of government, investors and corporate strategy.
But in the process of defining these additional requirements and adding more pages and clauses to the contract they have often overlooked the most fundamental commercial considerations.
Very few of the contracts we review provide either the specific details of the remuneration model or the details of the methodology used to calculate the fee. This means that often it is reduced to simply an annual and monthly payment figure in the schedule with little or no guidance on what this fee covers.
If there is specification on what a retainer covers it is usually to define the actual personnel covered by the retainer either by name or title. But rarely do you see a rate card in the contract schedules or appendices of the rates used to underpin the retainer or fee calculations and no definitions of the specific scope of work that the fee or retainer covers.
Of course there is usually a list or responsibilities that the agency may be required to provide but this is rarely quantified or specified.
Agency resources are not a measure of value
Often the mistake is made to analyse the agency fee or spend against the number of agency resources retained. The first issue is that the fee is only part of the spend and often retainers are only to cover a part or section of the agency resources used. So getting the definition right is important as you could be creating a misleading comparison.
A common procurement approach is to analyse the average fee per FTE (Full Time Equivalent) as a measure of value. This is a measure of cost per agency person retained or working on your business. It does not take into consideration the seniority of the agency personnel, which means that an agency providing a smaller number, but a greater percentage of senior people on the client’s account will have a lower cost per FTE than an agency that provides many more very junior and inexperienced resources.
In some cases the agencies hide the lack of experience behind inflated job titles to create the illusion of value. Does this mean the juniors are better value? The problem is this is effectively commoditising the agency resources, much like buying books by weight or paying for movies by duration.
There is no accounting for the experience and expertise of the agency staff beyond the most superficial assessment of the number of agency staff per dollar spent. One of the issues here is that often in winning the business through a procurement tender process the agency has filled the account with inexperienced, low cost junior staff only to have the marketers complain about lack of strategic ability and maturity.
Outputs is a better measure of value than resources
But a more important consideration is what did those people actually deliver for the fee paid. Sure, you may have a high number of agency staff retained of unknown quality and experience, but are they being under utilised, meaning you are paying for staff you do not need, or inefficiently utilised leading to job overruns on time and budget?
The only way to assess this is to forget about simply looking at cost per resource and look at the productivity of those resources in delivering outputs required.
In countries with relative low global costs of living, where resource costs are low, we have often noted that agency retainer numbers are often made up with additional low cost staff to reduce the cost per FTE resource and yet these additional resources contribute next to nothing in the way of increased deliverables in output. Effectively this is gaming the procurement approach to create the illusion of better value.
This is scope of work management and measurement, which we have discussed extensively. But it is the ability to capture and analyse the scope of work deliverables that is the most useful way of assessing agency value. What does it matter if you are either retaining less resources at a lower cost or more inexperienced resources at a lower cost if those resources are not delivering value in the way of outputs required for the marketing strategy.
Our colleague and Chairman Michael Farmer has developed the SMU metric for measuring the output productivity of a creative and digital agency, which compliments the TrinityP3 scope of work calculator in calculating similar resource requirements across media, social, public relations events and most other marketing communication suppliers.
Using these tools to calculate resource requirements for a specific scope of work either delivered or to be delivered provides a much more accurate and comparable measure of agency productivity and value for marketing dollar spent.
The ultimate measure of marketing value is performance
Of course the ultimate measure of marketing value is to be able to have an attributable return on marketing investment. To be able to measure and allocate the return on the spend in various channels and the contributions the various agencies make to the performance of those channels is the goal.
We have quite a few clients who have achieved this, particularly in the direct response and e-commerce category where they are able to track and measure lead and conversions across both on-line and off-line media.
Interestingly the offline media is usually broadcast, where they attribute the lead to a time period following the broadcast. In these cases the client is often moving some or the entire agency fee to a performance-based model to reward and incentivise the agency (or agencies) on the results delivered.
But many marketers struggle with measuring performance or with attributing the performance to the agencies. A number of times we have seen performance-based remuneration fail because of a conflict in the measurement of performance and attribution.
In one case, after a extremely successful product launch, when confronted with the bonus payment to the agency, the client argued that it was the excellent product that ‘could sell itself’ and not the agency contribution, a back-flip on their pre-campaign sentiments.
How to measure agency value
Unless you have a proven measure for marketing performance and an attribution model that recognises the various agency contributions, the ultimate method of measuring agency value is not available to you.
On the other hand if you are measuring agency resources against the cost of those resources then you are really not measuring value. Low cost resources can mean simply low cost. Even if you are comfortable with paying the lowest cost possible it could mean you are paying either for more resources than you need or you are using those resources inefficiently and therefore sacrificing either quality of output or time and cost.
The only way available for the majority of advertisers to measure agency value is to calculate the resources required to deliver the outputs required for the marketing strategy. There are a number of ways to achieve this. But whatever way you choose it needs to be robust, reproducible across multiple agencies, comparable to industry and customised to your specific marketing needs.
Do you know any systems or methodologies that can achieve that for you? We do, learn more here