edition 59 september 8, 2006

agency remuneration strategies

  

There are as many different remuneration models as there are advertiser / agency relationships. But which one is the right one for you? And how do you know if you are paying too much or too little?

In this edition of P3-news, we look at agency remuneration, and some of the issues and principles we have developed over more than five years of benchmarking and negotiating agency remuneration models on behalf of our clients.

In this P3 e-news...
-
the print despatch cost dilemma
P3 training is more than TV
top 10 downloads coming soon
- procurement insights

paying peanuts and getting monkeys? - remuneration strategies for smart advertisers

No one wants to be paying too much for their advertising. But likewise, there are downsides to paying too little. We see it all the time, advertisers call us in because they are unhappy with the performance and service levels provided by their agency. When we benchmark the agency remuneration, we find they are hopelessly underpaid.

The cost considerations

Many retainers are calculated on a resource, overhead and margin model. This is based on determining a set of dedicated agency resources, taking the direct salary cost of these resources and multiplying this by an overhead factor.

The overhead factor is to cover the indirect salary costs such as support staff like the receptionist and accounts, plus accommodation and utility costs and business development, IT and capital expenses. This overhead factor can vary from 60% to 120% depending on a number of factors. Then to this cost there is a profit margin of anywhere from 10% to 25%.

Of course if the salary rate is overstated then this adds to profit as the overstated cost is multiplied by the overhead factor and the profit margin. Understated, it cuts into the profit margin. Likewise with the overhead factor and the profit margin.

Paying too much

Many advertisers feel they are paying too much because they have compared their costs with what a colleague is paying. Unfortunately, with the complexity and diversity of remuneration models they are not often comparing like with like.

While overpaying the agency will make the agency senior management happy, it can lead to complacency developing between the agency and the advertiser. After all, the adage that the squeaky wheel gets the oil applies here, and if the agency is achieving a higher than average profitability from the client with little or no extra effort, they can apply less attention to this client over another who is demanding and underpaying the agency.

Paying too little

Paying too little forces the agency management to find ways to increase the profitability of the account. Typically there are a number of ways to achieve this:

1. Reduce the calibre and number of resources working on the business. By reducing the direct cost of servicing the account you can increase the profit margin. Replacing an account director with a senior account manager can go unnoticed if they have the same title on the business card and thereby save $10K - $15K per annum. This can become self-perpetuating as the staff on the account turn over more frequently due to burn out - having to deliver the same with less.

2. Increase the charges outside the retainer agreement
by increasing the number of changes made during the production process to increase production charges on each job thereby increasing the "extraction rate" for that client.

If you are underpaying the agency they will need to find a way to increase revenue and manage costs to increase profit.

Pay for the resources or the outcomes

At the end of the day what you actually want is outcomes and results, not just resources. If you just wanted the people, why not employ them directly. The overhead factor will be a lot less.

So if you want to pay for outcomes, firstly you need to define the outcomes you need for any period and the results you want these outcomes to deliver. Then you can strike a retainer or project fee for the agency to deliver the outcome and then a performance based remuneration for delivering the results.

This is a PBR model that tightly pays the agency for the delivery of the services and outcomes and then provides a significant and variable profit based on the achievement of results.

Getting the formula right

Some advertisers find it difficult to implement a PBR model because they think of the payment as a bonus. In the P3 model the agency is paid to cover their costs or at best make a small profit for the delivery of the services, but shares in a significant and higher profit margin if they participate in delivering higher than expected results in sales, market share growth or some other significant business measure.

To find out more on how to implement a smarter remuneration model, contact
biz@p3.com.au or call Sydney 02 9279 4997 or Melbourne 03 9682 6800.

P3 training is more than TV

 


P3TV Workshops for Advertisers are well known in the industry. But did you know we also offer advertisers full and half day training workshops in the areas of:
* Creative Management
* Design Management
* Direct Marketing
* Media Training
* PR Consultancy Management
* Print Production

Ideal for marketing teams from Junior Assistants to Senior Managers. For more information contact Georgia on georgia@p3.com.au for a costs and details.

 

top 10 downloads coming soon

 

 

P3's Top 10 hand outs have always been in demand. Very soon you will be able to download the entire set of Top 10's directly from the P3 website.

Look out for them at 'downloads' at www.p3.com.au

     

procurement insights 

 
 

Involved in procurement, purchasing & supply? Then look out for the Chartered Institute of Purchasing & Supply Annual Conference, Innovation in Procurement, Crown Promenade 17/18 Oct 06.

P3 will be at Booth 30 where you can pick up the very latest tool in "Marketing Negotiations for Procurement Professionals" as well as our latest Top 10 in Procurement.

Darren Woolley will also be speaking on 'Buying from Advertising Agencies' - Day 1, 2-3pm. Book now at www.cipsaconferences.com.au

 


P3 - helping people achieve commercial purpose through creative process

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