Paying the game

Just as retailers are continually putting the squeeze on packaged goods manufacturers’ profits – not necessarily to anyone’s advantage – marketers are taking tighter control of their advertising costs and are increasingly ruthless when examining agency invoices. Sales promotion agencies are being dazzled by the glare as the spotlight turns on them.

Kevin Twitty, chairman of Triangle, explains: “The quality of client personnel has improved enormously. They are considerably more commercially minded and better at negotiating than their agency counterparts. They go on specific courses and always did throughout the recession, when smaller agencies didn’t have the resources for training. Below-the-line agencies are not so good at negotiating fees. Ad agencies are better because advertising has such a high profile and clients see it as an essential requirement; direct marketing agencies can charge high rates because they’ve managed to retain the mystique of data manipulation and they are viewed as strategic partners; but for tactical sales promotion work that is commissioned on Tuesday and has to be turned around by Friday, it’s hard to justify large fees.”

Historically, sales promotion companies could keep fees low because they charged mark-ups on services they bought in, but that’s changing as clients begin to question commission levels, carry out their own sourcing and keep routine work in-house.

Twitty adds: “Clients are now doing more for themselves. If big companies can implement their own tactical pricing initiatives, design their in-store point-of-sale material or commission their own research, they will.”

To an extent, new technology is responsible for clients wanting, and having the ability, to do the work for themselves. “With the advent of the Apple Mac, many clients are taking design work in-house,” says Twitty. “But the main change is that, as an industry, we buy less and provide fewer services. Big clients are doing more of their own print buying.”

Michael Miley, group account director at Grey Integrated, agrees: “Clients look at premium prices and think ‘We could do that ourselves’.”

Debbie Rowland, group account director at The Marketing Store, has come across similarly confident clients. “Some big companies now have their own purchasing departments,” she says, “but most marketing departments are so lean these days that they don’t have the extra staff they need to handle purchasing as well. They set out to do their own sourcing but then find it too complicated, so about half of our clients still end up asking us to buy on their behalf.” Plus, she adds with cynicism: “If we do the buying, then the client has someone to blame if something goes wrong.”

Nestlé has a large sales promotion department, and has brought many functions of the job in-house. Its commercial channel manager Martin Janes explains: “The agency will devise a campaign and then come back and tell us what needs to be bought in to finish it. They get a price from their suppliers and we do the same to see who can get it cheaper.” He says it works out that more than half of Nestlé’s sourcing is done by the company and the rest by outside agencies.

Claire Prewett, trade marketing controller at brewer Anheuser-Busch, says her company runs increasing numbers of tailor-made promotions, requiring more sourcing of premiums. “The sales promotion agency will do the origination and design work. They might also source rewards, but we would then cross-check prices with our own sourcing department. Most of the time, our department ends up doing it.”

She adds that some initiatives are inherited from the parent company in the US. For example, Budweiser is currently running a promotion to win tickets to the World Cup finals. Budweiser is an official sponsor of the tournament and the tickets are available as part of the sponsorship deal. The UK sales promotion agency, Geoff Howe & Associates, devised the UK promotion, but without having to do any sourcing of prizes for it.

And when an agency does win the sourcing work, commission levels are kept to a minimum. Rowland at The Marketing Store says: “We make sure our transactions are totally transparent. We show the client all the supplier invoices and agree commission levels so people know exactly what they are paying for.”

So, now that the job of buying print and prizes is being wrested from them, and the commission they receive on those deals is withering away, what are sales promotion companies doing to maintain their profits?

“We make our money now from fee-based consultancy work,” says Grey’s Miley. “If we get the purchasing work as well, then that’s a bonus.”

To prevent their income being eroded by the move to fee-based work, sales promotion agencies agree that the main task now is convincing clients of how much work they do and how valuable that work is.

“Sales promotion is very labour-intensive,” says Twitty. “What an agency is really doing is selling man hours. We keep half-hourly timesheets and use those to justify our fees.”

Rowland at The Marketing Store says: “We still mainly work on the basis of project fees, where we are not asked to justify hours. But a couple of clients that have been working on the basis of retainers for a number of years have recently said they want to do things differently, and look at moving more towards timesheets. Sometimes this shift is encouraged by us. If the client asks us to do extra work, then we keep timesheets to show how much extra work we are doing and to demonstrate how much it costs.”

Staff at Marketing Perspectives do the same. Chairman and chief executive John Williams explains: “We now keep timesheets across the agency, which is something we didn’t do five years ago. We are happy to do a breakdown and show clients where time has been spent.”

Janes says Nestlé prefers to agree fixed project fees than pay bills based on hours worked, but Janes still likes to understand how long things take. “Rather than being hit by costs you weren’t expecting, it’s better to fix the budget in advance. We look at what the agency is proposing in terms of an hourly rate and then set a fixed fee for the total job.”

Williams believes there is good coming from this: “Out of the greater analysis of cost structures comes a recognition of the number of hours things take to do. The move towards higher fees and lower commissions means clients now appreciate that, while it only takes a few seconds to type out a copyline, it might take a very long time to generate it.” Grey’s Miley agrees: “What we’re offering is creative input and strategic thought.”

Marketing Drive is another agency that has turned around the way it makes its money. Ten years ago, most of its income came from commission, says managing director Clive Mishon. “Over the past five years, we’ve made a concerted effort to move towards fees,” he explains, “but timesheets are only part of the equation that goes into them. Creativity is about much more than account-servicing hours. The fee needs to reflect the creative inspiration.”

Mishon believes sales promotion expertise is greatly undervalued: “A study by the SPCA found agencies were charging out their services at between 120 and 130 an hour. When you compare this with other professions, it’s crazy. A law partner would be charged out at twice or three times that amount. Even the best sales promotion practitioners, who may have 20 years’ experience, are cheaper than junior doctors or lawyers. We have to drive home the message to clients that they are working with professionals and pay them accordingly.”

Some clients claim they are already appreciative of the skills of the agencies they work with, and learning how to use those skills to best effect. Dave Smith, marketing manager on Golden Wonder Crisps, says: “Marketing departments are leaning more towards employing specialists in any field and treating them as partners. There is a shift towards more retained relationships to develop that spirit. We will pay fairly for excellence of ideas and service. We want to work with suppliers that understand the ethos of what the relationship needs to achieve.”

Perspectives’ Williams also believes in enlightenment, coupled with self-interest, of course: “A contract can only work when both sides are happy. Clients know that good agencies need to make a certain amount of profit to continue to invest in good people who will continue to do a good job.”

He thinks agencies should not be dismayed when the client’s spotlight falls on their invoices and practices; instead, they should see it as an opportunity to shine and prove their worth. The agency’s income need not suffer. “We understand that clients want value for money; they understand that we want profitable work,” he says. “The key is that the sum of money needs to remain constant, even if the way it is paid varies.”

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