BY aarrieta
In economy is known as “principal-agent problem” or agency conflict where all difficulties that arise from asymmetric information, when the principal (a client for example) hires an agent (an advertising agency or a media) to perform a job for him, are addressed.
In advertising you go through it every day and I believe that is a problem of the model that the entire industry tries to apply and mainly in which an idea is remunerated.
In the beginning advertising professional just charged an agency fee of 15% of the ad, but due to uncountable reasons this tended to change.
How they work today:
The agencies (creatives, i-builders, developers, consultants, etc) have a model based on the “billing hours”, which may (or may not) be combined to a monthly fee that may (or may not) contain a minimum of hours.
Media centrals (brokers, networks, planners, optimizers, etc) based their business model on charging a percentage of the ad in the media.
An unavoidable reality
It is unavoidable that it is very hard to price and idea and a good implementation of the idea. The approach that the industry has (which includes suppliers and clients) is to value the idea according to the cost of creation and not on what it can achieve.
It is like paying a book writer per word or per page instead of paying him per sold book. What differences a master piece from a best seller is no the amount of pages, but a qualitative factor that is very difficult of measuring a priori, but that without a doubt hast nothing to do with you put on the meat grinder but that dish that the chef prepares.
Vicious circle
The industry is immersed on this model that generates a vicious circle where the agencies are worried to use the arranged hours or to develop a project that will produce a piece that uses all the necessary resources. That all the media budgets is invested and if it is possible to request more, since the agencies earn more when producing more and not when is more efficiently done or when more is achieved.
On the other hand advertisers many times are disconnected from the economic results that advertising generates or in the best case scenario they pretend to remunerated the agency at the lowest possible cost.
What ends up happening is that advertisers, when the need to renegotiate their agreements with the agencies they tend to reduce the fee if the previous year something didn’t go well, and only if things went really well they are will to do more. This decrease generate that for the agencies in order to maintain the profit level, reduce the seniority of the team they hire, reduce that amount of indirect hours of the project or the third-party what the can not cope with, being this one of the causes for a low efficiency the following year.
Proposal for a change
The proposal is to get out of this model and to move towards an association between the agency (in all its forms including media) and the advertiser, where the agency takes the risk of disseminating the final economic impact that its ideas may have and the advertiser were willing to share the economic benefits of his company, in the short and the long term and to have a mind openness to accept the needed changes proposals.
This trend is starting to be seen for example in the media that are willing to run CPA and revenue share campaigns, relying on the quality of its audience and taking an active roll when optimizing the campaign. The benefit for the advertiser is buying with success guarantee or not paying, and for the media to obtain higher eCPMs than the fees in the segment.
Some restraints for this model
Boosting this industry change is possible but it will have many restraints:
– Very big clients where is impossible of making a decision on sharing risks.
– Clients unwilling to make changes in the brand or taking communicational risks.
– Agencies that is comfortable for them not to measure the results of their actions in other places that is not a creative competition with its peers.
– Agencies that perceive that the risk can take its brand into a failure
– and many more..
Conclusion
It is necessary to align agency objectives with client objectives, sharing efforts and benefits can be the way, doing what each one does best.
It is a great opportunity for medium size agencies and clients who are both hungry for success.