The shift to value, not cost in marketing

This is the next in a series of one-minute videos that address one of the many complex challenges facing marketing, media and advertising today. The Golden Minute series is an attempt to prove Albert Einstein right when he said “The definition of genius is taking the complex and making it simple”.

But he also said “Everything should be made as simple as possible, but not simpler”. So we will leave it for you to judge. Please let us know here if there is a topic you would like us to cover in a Golden Minute.

The danger for marketing is that as Oscar Wilde said “we end up knowing the price of everything and the value of nothing”. Media pricing, agency fees, production costs are all being questioned and continue to be under pressure. But when is value to be added to the equation?

The first challenge is to define value.

This is not a challenge where marketing is seen as an investment. But if marketing is a cost then the sensible business strategy is to reduce it.

The same with agency fees.

Agency fees are generally defined as a cost. The cost of the resources by the overhead cost by the cost of the profit margin. It is a cost recovery model for the agency and therefore simply a cost for the advertiser.

So what does value look like for an advertiser when it comes to their agencies?

At a minimum advertisers should be more interested in the productivity of their agencies than the cost. The measure of agency value needs to change from the number of people retained by the fee to the output those people deliver. This is agency productivity. It means you are able to actually measure the value of the work of the agency rather then the cost of the people retained. This is a pricing based value approach to agency fees.

But while productivity is a huge leap forward in a measure of value there is a more business relevant measure of agency value for marketers.

If the marketing budget is an investment then what is the measure of the return on that marketing investment (ROMI)? If you can define this or it is clearly defined then the next question is what is the contribution your agency (or agencies) makes to delivering this outcome?

When you can answer the value of the contribution the agencies make, then you can start to pay your agencies for the value they contribute and not their cost.

Let’s use an example to illustrate. You brief your agency for a new campaign.

Do you pay them for the cost of developing that campaign idea and the implementation? A cost based on the number of hours the agency spends on that development and implementation?

Or do you pay them for the value of what they produced? The value of the work based not simply on the cost, but the value it represents to your strategy and your marketing budget?

Or do you pay them on the value created?

This year the breakthrough Nike campaign featuring controversial NFL Star  Colin Kaepernick led to a 31% increase in sales and increased Nike’s shareholder value by $6 billion.

Now imagine if you paid the agency for the value created by the creation of that idea? Or at least remunerated the agency for their contribution to the value created?

That is how we move from cost to value. And isn’t that worth doing?

Golden Minute Script

A question I get a lot is “how much should a big idea cost?”

Well what do you think?

If you are paying on retainers or hourly rates the real question is, “How long does it take to have a big idea?”

And that is how long is a piece of string.

The agency will want it to take as long as possible and involve as many people as possible.

In this case the seller is setting the price or cost.

But here is a better question, “What is the big idea worth to you?”

I know that is not easy to answer, but consider…

How strategically important is this idea? What is the financial value of the brand or business you will use it to promote?

Suddenly you the buyer are setting the price.

The price represents the value.

The value the agency work represents to you and the business.

And it is not just big ideas.

You can set a price or value on anything and everything.

It is value based pricing.

Because marketing is not a cost. Is it?

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