Why Value Trumps Cost in Agency Remuneration Fees

My grandfather was a frugal man, borne no doubt from living through the Great Depression, then going to war and returning to a country wracked with post-war austerity.

But he wasn’t cheap: he would happily open his wallet and pay for things he thought were good value for money. In the pre-internet days, he would meticulously research, decide on the item that best fit his needs, and pull the fiscal trigger. He didn’t wait for sales; he didn’t ask for discounts; he didn’t buy something just because it was cheaper – he figured out what he needed and bought the best he could afford to use the said item for as long as possible.

I remember being 15 or 16 years old, marvelling at his small but impeccable wardrobe of custom-made suits and shoes, much of which he had worn for at least 20 years. “I can’t afford to buy cheap clothing” (or cheap cars, or cheap furniture, or cheap anything for that matter) was his oft-quoted refrain. He bought the “right” things that gave him the most utility and was prepared to pay a little more to get exactly what he needed. (Google “cost per wear”).

I’ve inherited that philosophy, so it perplexes me professionally when I see clients focus on agency cost over value.

But Surely Cost Is King?

Look, I get it. Profligacy is a dirty word, “shareholder returns” are sacrosanct, and there is always a budget to consider – but all too often, the benefit that an agency will bring to the advertiser’s business is disregarded in the quest to “make it cheaper, make it cheaper, make it cheaper!”

A well-run agency selection process (or incumbent review) invariably leads the marketing team and C-suite to identify capabilities and skill sets demonstrated by one agency being superior to the other agencies in the mix. And yes, that sometimes comes at a premium.

So many times have we managed tenders where clients who expressed dissatisfaction with the performance of their incumbent turn the conversation at the eleventh hour to which agency fees will be the least expensive, completely forgetting the entire reason for the review in the first place: which agency is best placed to help drive consumer engagement, market share, customer acquisition, conversion rate – or whatever metrics agency success is going to be measured by.

So What Is “Value”?

“Value” is the benefit a buyer derives – real or perceived – from purchasing a good or service.

“Value for money” is when the benefit derived is greater than the price paid – although the benefit doesn’t necessarily have to be a monetary or commercial return: an agency’s tools or processes that make your marketing team’s life easier can be “valuable”, for example.

In both cases, the benefit is contingent on context and circumstance; the valuable services and deliverables to one advertiser may be inconsequential to another.

As a marketer managing an agency roster, you should assess the value of the services and deliverables you receive from each agency.

Some will be highly important to your marketing programme and business objectives and, therefore, of high value (e.g., strategic development, brand identity and positioning, tent-pole communication campaigns).

Some will be of low importance and value (e.g., short-lived content production; media buying in seldom used channels).

The purpose of making this list is to identify what your organisation deems valuable and then to pay the agency an appropriate fee for those services and outcomes.

If you believe agency ‘A’ can best deliver what’s most valuable to you but then choose agency ‘B’ because they’re cheaper, then that is like chasing fool’s gold – it’s money wasted regardless of how much of a “saving” might be had because the outcome and impact on your business will be less than the better option.

Be more like my grandfather: he didn’t waste money on something just because it was the cheaper option if it didn’t fulfil his requirements.

Even worse, don’t insist the more expensive option has to match the cheaper option in price. That’s not to say there isn’t scope to negotiate, but pushing too hard, in our experience, damages the relationship before it even starts, and you will wind up getting a lesser product than what attracted you in the first place and not getting the outcome you thought.

If you’re after an agency as a commodity, where any agency will do (the “low value” services on your list fit this description), then, by all means,, go with the cheapest. But if you find a true partner agency where the chemistry is right and understands your business, maybe paying more for the value they’ll deliver is the right decision.

The dictum “you can always procure something cheaper” is never truer; there will always be an agency out there that is willing to cut your cost – but is the cheapest the right agency to take your business forward?

Can you afford to hire a cheap agency?

Contact us to discuss what value means to you or learn more about our approach to Agency Commercial Evaluations, including Agency Fee Modelling and Agency Fee Benchmarking.