“I hope I have to pay you a fortune.”
A client texted me this message recently in reaction to a campaign proposal. This client is participating in a pilot project my agency started last year. We wanted to see what would happen if we flipped the traditional agency business model. In recent months, that question has been answered several times over with reactions similar to his.
The advertising agency business model is not something I’d ever given a lot of thought to until my friend Lee, one of Europe’s top corporate lawyers, asked me to explain it to him. I described how agencies pitched for business, ran projects, set prices, billed for their services, and how they were staffed. I saw a furrow cross his brow that only grew deeper the more I explained. When I finished, Lee looked at me quizzically and said, “So, let me get this straight…” What followed was an accurate paraphrasing of everything I’d just described. But, hearing it spoken back had a profound effect on me. I’d never realized how ludicrous the whole thing sounded.
Back around the time when Don Draper was pitching his first Lucky Strike campaign for Sterling Cooper, ad agencies ruled the marketing roost. It was during this time that many of the conventions that define how agencies operate as businesses gelled into what has become the traditional advertising agency model. Fifty-five years later, a lot has changed. Most notably, the Internet has triggered an economic paradigm shift on a historic par with the industrial revolution. The result has been a virtual Cambrian period in agency evolution that has produced a much more diversified marketing ecosystem. This system is populated with a multitude of new species, such as web design firms, digital agencies, content agencies, marketing automation firms, SEO agencies, social media shops, and the dozens of more exotic hybrid concepts like crowd-sourced agencies, etc.
On the surface, these descendants of the traditional ad agency bear little resemblance to their Mad Men ancestors. That’s because they’ve adapted by evolving the services they sell. But, if you look a little closer, you’ll see the apple hasn’t fallen as far from the tree as we might think. That’s because, while non-traditional agencies have radically evolved their services to reflect marketing in 2015, most of them are still operating off a business model that mirrors Madison Avenue during the Eisenhower administration. To truly adapt to the times, marketing firms today need to look beyond their service offers, and reexamine the conventions that define how those services are priced, performed, and sold to clients.
My own digital marketing agency has felt these evolutionary pressures. About a year ago, Duffy Agency began an initiative to further refine our service offer to provide greater value to our clients. But, after my conversation with Lee, I wondered if the obstacle to providing greater value was not our service offer as much as it was our business model. (It’s worth noting that while our service offer was routinely updated, our business model was not.) It was the standard agency model that I’d emulated from my previous employers. Our clients were happy with the arrangement and so were we. The normality of it all is what blinded us to its absurdity.
Reading up on authors like Blair Enns, Tim Williams, Ron Baker, and Mahan Khalsa led us to an inconvenient truth: At almost every step in the relationship, the traditional agency model pits the financial interests of the agency against those of the clients. For example, take how traditional agencies charge for work. They base fees on time sheets. Unsolved marketing problems can cost clients dearly, so they want speedy solutions. But, in principle, the slower the agency works, the more money they get paid. Marketers talk about how important strategy is, but that’s often given away for free as value-add to the creative product. Measurement is rarely discussed when determining price, so clients pay for “stuff” rather than the results that the stuff is created to produce. And, since agencies maintain an in-house stable of creatives and producers, they are incentivized to shape their strategies around their team’s skills rather than the other way around. Perhaps the most arcane aspect of this model is the way agencies win business in the first place. They pitch for it, which means a group of up to ten agencies set out on a half-year competition to solve a problem with little access to the information required to define a valid solution. Worse still, this activity shifts resources away from loyal clients to solve problems for strangers — for free.
We set out to tweak this model. But, after a couple of days, we discovered that, in almost every instance, the best choice for us was to take agency convention and do exactly the opposite, or, flip it. Thus, the “flipped” approach! Once the whole thing was turned inside out, it all began to make sense again, particularly for our mid-sized clients. For instance:
At first, we had plenty of push-back within our own ranks. That changed over the latter half of 2014, when we put this flipped model to the test with a few pilot projects. First, we noticed a step change in client-agency relations and the way decisions were being made. We had always felt we were partnering with our clients. But, when you back that sentiment by aligning the financial interests of the agency and client, it creates an entirely different dynamic. This, I believe, played a role in producing better results for the clients in the pilot, which, in turn, provided more profit to Duffy Agency than we would have earned under the old model. Based on results from the pilot, we recently created a new growth program for mid-sized companies using the flipped agency model. It’s in its early days, but so far the response has been encouraging.
- Pricing: Replace time-based pricing with value-based pricing.
- Risk: Instead of loading all the risk on the client, share it with performance-based compensation wherever possible.
- Time Scale: Working towards three-year growth objectives (as opposed to short-term campaign objectives).
- Profit Centers: Redistribute agency financial incentives more evenly between strategy, creative, and management (as opposed to creative only).
- Staffing: Instead of staffing for creative superiority with a mostly in-house creative staff, strive for creative adaptability by supplementing a smaller, tight in-house team with a global network of vetted contract talent.
- Focus: Placing strategy at the center of the agency’s offer with creative services as value-add.
- Payment: Replacing one-size-fits-all payment terms with a tailored approach, using conventional flat-fee payments as well as performance-based fees, commissions, equity, or a combination thereof.
- New Business: Replace pitching with a more in-depth dialog about capabilities, cases, and chemistry.
Our version of the flipped agency model is surely not for every marketing firm or for every client. But, if you are an agency or a business looking for new and innovative solutions, a good place to start is with the conventions that define the way you do business today. Flip a few of them over and you might be surprised what you find.
Sean Duffy is a founder of Duffy Agency, the digital marketing agency for aspiring international brands. Sean has over 25 years of experience working with strategic marketing in Boston, San Francisco, Stockholm, and Copenhagen. In addition to his involvement with Duffy Agency, Sean is a frequent speaker on strategic international marketing and online brand management. He serves also as Lecturer and Practitioner in Residence at the Lund University School of Economics & Management and as Mentor in their Masters Program in Entrepreneurship. Sean is an active member of TAAN Worldwide where he has served two terms as the European Governor. He is also a speaker, blogger, Twitterer, and is on LinkedIn. With offices in Malmö and Boston, Sean splits his time between Sweden and the States.