With agency costs on the rise, how should advertisers respond?

Believe it not, advertisers have generally enjoyed a stable and relatively low cost for agency services for more than a decade. While it may not feel like it on a case-by-case basis, with many advertisers going to pitch to try and procure lower agency fees, the fact is that in many of the developed markets, agency salaries have remained relatively stable, often not even keeping up with cost-of-living inflation. But this situation is about to change.

It is time to buckle up. We continue to hear from agencies that the cost of retaining and attracting agency staff has significantly increased. The effects of the great resignation combined with restrictions related to the pandemic have exacerbated agency staffing and retention issues at almost every level, which almost certainly means your agency rates can’t stay where they are.

With reports of agency salaries increasing by 20% or more, it will not be long before you have a call from your agency to talk about fees. Or if your agency contracts are coming up for renewal soon, then you need to be prepared.

You could do nothing

President Gerald Ford is believed to have seen himself as a ‘Caretaker President’ after the resignation of Richard Nixon, and therefore would always ask the question, what is the worst that could happen if we did nothing? It is worth asking because often situations do not demand an immediate response. Such as in this case.

Yes, the churn rate of agency staff is increasing. But then it is increasing across most categories of business. The great resignation is not confined to advertising or even marketing. If the agency continues to provide the service you need at the level of quality you need, then is action needed? It could be better to sit tight.

But with long term agency salaries remaining flat and agency working hours continuing to be long, agencies are suffering. So, if the churn in agency staff impacts performance on your business, and there is a material drop in essential services provided, then you will need to manage this. The biggest risk you are facing is if key people on your agency team are poached to another agency because your agency does not have the financial resources to retain them.

Negotiate new agency fees

If the agency is going to raise the issue, it is likely to be through one of two approaches. The first would be that they need an increase in agency fee because they have been absorbing the underlying increase in the cost of agency staff and that they are unable to maintain the service level required. The second approach will be if a key agency team member is being poached by another agency and they are raising it with you because to retain them they are looking for an increase in the fee to fund this.

The first approach is a financial argument. The second is more an emotional appeal and plays on your desire to retain the individual working on your business. It is the second that is potentially more problematic. But we can come back to this later. Let’s first deal with the new fee required to maintain the team.

If the agency has been with you less than two years, the issue is less of a problem, because you would hope that a fee set two years ago would be suitably up to date so that there would be enough margin in the deal to absorb this type of market inflation. After all, while there are reports of increases of 20% for individuals to be recruited or retained, this is one of two positions in a retainer or fee covering potentially many more individuals. Therefore, the total increase will be nothing like the quoted increase and in fact will be perhaps 2% – 5% at the most, depending on the number of staff under the fee.

But if this is a long-standing arrangement and the agency has had little or no fee increase over several years then it is incumbent on the agency to provide the business case, with evidence for why the fee needs to be increased to maintain the service level expected.

Avoid paying for the individual

The second approach, being a request for an increase in the agency fee to secure a particular agency staff member, is an emotional play by the agency. It will usually be someone seen as essential to the relationship. Typically, it will be a senior account management person or perhaps even a creative or strategy person. The agency is banking that the loss of this person would be an event the advertiser would want to avoid.

The feature of this approach is that the amount, even if it is 50% of the individual’s salary, including agency overhead and profit margin, while not inconsiderable, will be relatively small compared with the overall agency fee amount. The argument would be that it is a small amount to keep this person working on your business. The truth is the amount will indeed be small, but the key question is how much will this cost the advertiser in the long run?

A marketer was effectively held to ransom when they insisted that a particular highly talented account director be hired to the business. Although they subsequently found that this person came at a premium, they were nevertheless willing to pay upfront. What they had not allowed for was that in-demand talent is regularly poached. And so, over the space of two years, they found themselves increasing the fee for this person each time poaching was attempted.

Try to avoid taking your agency to a pitch

With the current churn in agency staff, we have heard of several marketers taking their agency to pitch, hoping to find a more stable and secure team. The inescapable fact is there is an affordable talent shortage. So, changing agencies will either not provide the stability you need, or rob you of the quality talent you require or come at an inflated price. Why?

Agencies do not have an available employee base to work on your business. If an agency wins your account, then depending on size, the agency will need to recruit new resources in a market where talent is scarce and increasingly expensive.

Agencies have become quite adept at keeping salaries down to remain competitive in the market. But with increasing staff leaving, this means replacing those staff or increasing resources for a new client becomes expensive.

While the winning agency will still need to be competitive to win, the fact is that limiting the financial resources needed to recruit talent to your account may mean you end up with the B Team, or even the C or D Team working on your account.

As for your incumbent agency, when they lose your account and need to shed cost, it will not be the talent they let go, it is usually the underperforming staff, who are then available and in the market to be picked up by the agency you have just appointed.

Become the desirable account

There is a way to help your agency attract industry talent to work on your account, without it costing a fortune. That is, become a client everyone wants to work on. This means:

  1. Paying a fair fee for the staff and talent you need and not just the lowest tendered prices (or worse a lower cost than you paid previously).
  2. Provide your agency with opportunities to do great work for your brand and your business to solve your marketing challenges and drive your business growth.
  3. Acknowledge and reward (not necessarily financially) the agency and particularly the key staff that go above and beyond for you and your business.
  4. Be mindful of the agency’s time and avoid sending requests to the agency at the end of the day for delivery tomorrow (particularly on a Friday night). Allow them to have a life too.
  5. Champion the agency’s contribution to success within your organisation and externally to the market in the belief that their success is your success and vice-versa.

And finally, if you need advice on any of these points, let us know because we have learned what it takes to be over benchmark on agency talent without paying a fortune.

TrinityP3’s Agency Remuneration Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal. Read more here