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What’s Wrong with the Agency’s Business Model?

You might not be able to tell from the surface but beneath the veneer of ever growing galas and awards, the advertising industry is facing an existential question. A recent article from The Economist even question the pertinence of branding. Those who are close to truth can’t deny that agencies’ profit margin are tanking, account tenure have shorten considerably, new unexpected competition are threatening an ever shrinking pie – all while dealing simultaneously with cut-throat talent competition and rising cost.

What happened? How did a hugely profitable industry get reduced to such a sorry state? What changed since the ‘60s, ‘70s, ‘80s? Where is Don Draper?

Wrong competitive advantage

Media commission exemplifies this point well; agencies used to command premium commission because they have collective bargaining power. Even after paying the additional commission, client knows media would cost considerably less than buying from traditional media owner directly.

Economy of scale however does not apply with digital media, most digital platforms such as Google and Facebook priced their media inventories based on results. Cost per Click are directly influenced by an agency’s capability to perform optimization, and not spent volume. Thus, the ability to deliver better savings for clients and hence compete more effectively as an agency is determined NOT by Economy of Scale but the Skills to deliver results.


Wrong pricing model

The misalignment of interest and expectation between clients and agencies cannot be understated. In two (here and here) separate surveys:

1. 55% of clients request for a greater accountability from their agencies. 71% of them believe their agencies are falling short in terms of accountability

2. 78% of clients fire their agency due to business performance issues

3. Only 55% of clients view their agency as business partners

In a nutshell, what clients want is an agency that is deeply entrenched in their business objective. They are seeking an agency which wants a long-term relationship, beyond mere campaigns or mediums, but to share the risk and reward in growing the business. Bryne Hobart describe the agency’s ideal business model as “Royalty on the growth of others…”



And how are agencies responding? Man-hours, like a bad pimp. Clients are seeking long-term business partners while agencies are selling result-independent effort. I hate the man-hour based model for several reasons:

1. There’s no market for effort. Like a cosmetic surgeon, an agency’s work produces scalable results (unlike an oncologist which produces binary result; either you’re cured or you’re not). The “authenticity” of your nose job depends on which surgeon you employ, which in turn depends on your budget – but cosmetic surgeons don’t get paid just for turning up, they need to deliver results. A good pricing model should align compensation with results.

2. Commoditize the synergistic value of an agency. A good agency is more than just a loose collection of different talent, it has a way to curate, align and amplify their talent to produce great work. Profit by means of inflating the talents’ man-hour send the wrong signal – as though quality can be preserved at reduced cost by simply substituting with lower-rate talents. Man-hours devalue the struts which enables the synthesis of talent to happen, it encourages client to think it is possible to replicate a well-oiled agencies with disparate freelancers. No wonder this survey discover clients perceives agency’s value to be 18% less than what they are currently paying.

3. Forever vendor. If all you have is a hammer, everything appears to be a nail. Today, a single campaign requires 5-6 different agencies (Creative, Digital, Media, Activation, Shopper, Outdoor Specialist, Research, Audit) to execute. Each agency contends for the same budget. Man-hour billing prevents both client and agency from seeing the big picture (how will any of this help my business objective). Each “specialist” agency will seek greater usage of their man-hour at the expense of another. Client are too busy managing egos, coordinating effort, counter-auditing claims to notice. The end result? Agencies lose the credibility to become a business partner, clients get frustrated, account tenure grows shorter, business development cost increases further and finally margin drops lower.
Wrong employee compensation

I have spent considerable time pondering over the sluggish speed our industry is responding to the new digital landscape. How is it possible for consumers to spent more time online compared to any other medium, and yet for digital spent to remains at only 5% of total ADEX?

Surely, this opportunity cannot escape my peer’s attention – why aren’t they making the necessary change?

Here’s what I suspect; like every other public listed company; listed agencies have to release their quarterly or annual financial report. Shareholders usually demand quick and constant appreciation for their investment. Thus public-listed management must live from quarter-to-quarter, and this metric and mentality trickle down to employee’s KPI and appraisal. Despite what some might choose to believe, the Internet is not just another medium – it is a game-changer, an inflection point similar to when Andy Grove reinvent Intel from a memory to processor business or when Fujifilm diversified from celluloid films.

Responding to the new landscape requires tremendous amount of change; painful change which requires execs and boards to sacrifice present gain for long-term sustainability. Not something most short-term tenure execs are willing to do (there are few very good exception). I have experienced the ease in selling a RM 3 million-budget TVC to a client, and yet grovel for RM 300,000 digital budget from the same client. What would you do if you’re in the same shoe, if you have the same pressure to deliver stronger growth next quarter?



I believe agencies must be intellectually honest to confront, analyse and adapt to the changing circumstances. Agencies must introspectively examine their identity, purpose, pricing model, recruitment and compensation scheme and product to reflect RESULT. As usual, all the above would be ineffective without honest integrity from the leaders to motivate and empower change internally and rebuild trust externally.

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