Woolley Marketing: Paying more or less for your agency fees
In his regular column for Mumbrella, Trinity P3 founder and global CEO Darren Woolley explores the subject of agency fees and salaries.
Agency salaries are on the rise. That is according to the agency leaders who find themselves competing to attract and retain the top talent. But it should not be a surprise, since the industry has enjoyed basically static, and in real terms, negative salary growth for more than a decade. Since we started monitoring and analysing agency salaries and fees, more than two decades ago, it has been more surprising how stable agency salaries have been.
Cartoon by Dennis Flad, with permission (2022)
In the face of a global talent shortage, exacerbated by the pandemic, agency salaries are rising. But not across the board and only for the in-demand, top tier talent in key roles. This is not a situation unique to Australia. Advertising agencies around the world are struggling to attract and keep talent. In the US this is called the Great Resignation.
So, what is the impact for advertisers? Should advertisers be prepared to pay their agencies more or less during the coming months and years?
To answer this, let’s explore the factors influencing agency fees. In the simplest version of classical economics, this can be explained as supply and demand. But it is a story in two parts. The first is the supply and demand for agency services. The second is the supply and demand for the talent who deliver those services.
On one hand, there are more agencies than ever before. Yes, while many of the holding companies feel like they are radically rationalising their bloated portfolios of agency brands, there are new independent agencies popping up overnight, like mushrooms after a heavy rain. There is no shortage of choice when it comes to advertising agencies. This excess of supply is an industry feature that procurement and marketing teams have leveraged well to create downward pressure on agency fees. Regular go-to-market (pitch) reviews bring a competitive tension that maintains that pressure.
But if you are an advertiser in one of the crowded and highly competitive categories, such as financial services, and rigidly hold to a broad definition of agency conflict of interest, your choices may appear limited. If however you are willing to lower your standards, there are still plenty of agencies to choose from.
This is the insight on the agency landscape. Not all agencies are equal. Like any statistical population, advertising agencies will provide a normal distribution curve on quality – or on a more empirical metric of price. The more in-demand an agency, the higher the fees they can attract. This is why we have never used an industry average as a benchmark. Instead, we benchmark based on a tiered approach to the market, with the high-demand agencies at Tier 1 and the lesser-demand agencies at Tier 3.
But what defines the agency tier? This is a combination of factors – reputation, client base, and most importantly the ability to attract and retain key talent. And here is the other side of the supply and demand consideration. Just as agencies will statistically occur across a normal distribution, so too do the people who fulfill the like-for-like roles across those agencies. It is at the top of this talent pool where the greatest competition is occurring.
While this is normal, it has been impacted by a number of factors: many years of agencies staying competitive by having their teams do more for their client with fewer resources; the diminishing desirability of advertising as a career path for the top tier of graduates (due to low entry salaries and poor working conditions compared to their other career options); and a greater number of departures from the industry to other options as the reality of the return to the office kicks in.
So, do these mean advertisers are facing a reverse of the recent trends and are going to be paying more for agency services? Like most of these questions, there are several answers, and they are dependent on the specific needs of the advertiser. If you want the best agencies with the best people, then you will end up paying for it. And if you don’t, then while you may choose the best agency, it will be more uncertain as to whether they will be able to attract and keep the best people on your business.
But for most advertisers, the fact is the market is saturated with a wide range of agencies with a wide range of skill sets, capabilities and quality of people working in those agencies. The nearer to the industry average in reputation and fee you are as a marketer, the less likely it is you will be working with the best in the market. And to those who have spent the past decade priding themselves on reducing their agency fees below the industry average, then all I can say is, the idiom is truer today than ever before: if you pay peanuts, you get monkeys.
Darren Woolley
Darren Woolley is the founder and global CEO at Trinity P3. Woolley Marketing is a regular Mumbrella column.
Pretty sure these days you don’t get the Monkeys for peanuts – especially not with the AI overlords expecting consistent 30%-ish margins!
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