The Advertising Agency’s revenue model has undergone major structural changes over last thirty years and even today is evolving and changing almost every year. The only take out of the ever changing agency compensation model is that the percentage of agencies’ earnings have been on a regular downslide reaching a point where it is nearly marginalised and the agencies’ earning per rupee of the client’s advertising spend is going down the precipice.
In my long career spanning nearly forty years in advertising agencies, I have seen many models of agency’s revenue earning, starting from the 15% media & production supervision commission plus art charges as per agency’s standard Art Rate structure operating from far earlier years, may be from the time ad agencies started operating in India in the 1930’s. this has lasted till about early 90’s (60 years!), when the concept of 15% started getting questioned and the ad agencies started wilting under clients’ pressures and began to give in.
In the seventies and eighties, the large and medium sized advertising agencies used to attract the best talent from the industry. And Management trainees were recruited from the best management institutes (IIMs, XLRI, Jamnalal Bajaj to name just a few) through campus interviews. Advertising agency jobs in our early days were the most coveted and sought after. And the most paying as well. On an average, the management graduates in agency jobs used to start off with at least a 10% over the parallel jobs at manufacturing or other service industry jobs ( barring of course a few FMCG organisations like ITC, Levers, etc). This trend continued even in the late eighties, and I have conducted many campus interviews to recruit from leading IIMs, and other top ranking institutes where the students were eager to join advertising.
Come early nineties, the agencies’ earning began to undergo changes (as it was happening in US and Europe and certain APAC regions), and advertisers started talking about a fee based + commission model. This also coincided with the advent of specialised media agencies (many of these offshoots of the large global agency chains) who started bidding at 2.5% for media planning, buying and release services. Advertisers started finding this extremely attractive and soon there were bifurcations made between creative and media agencies. The fee concept started putting the agencies on a back-foot and if agencies did not have the media release mandate, their revenue % (which was now in fee form) obviously started shrinking. With the competition stiffening up both in creative and media agencies, the fees for creative agencies and the commissions for media agencies too were being re-negotiated below 2.5%, as well.
There was a brief intervening period ( in early nineties ) where some organised and large clients (Levers, Nestle, ITC, etc) , if they took the creative ( say a TVC, a press ad or a radio spot) from their creative agency and released through their separate media AOR, used to pay 12.5% commission to creative agencies and 2.5% to media agencies. This was actually based on a formula agreed between AAAI (Advertising Agencies’ Association of India) and the ISA (Indian Society of Advertisers). But this did not last beyond a few years and was flouted by most advertisers who found paying flat monthly fees to the creative agencies (instead of 12.5% commission on releases) far more lucrative. This was the final nail in the coffin of the 15% formula.
The quality of talents that agencies used to attract in the ‘15% commission era’ saw a huge qualitative drop with the advent of the new agency compensation models, starting mid-nineties, and continuously evolving over the years that are making the agencies’ lives more and more difficult. The sad part of the story is that the manufacturing and the other service industries’ (Telecom, Banks, Insurance, IT) salary and employee compensation model have far overtaken that of ad agencies. As a result, the top quality talents agencies used to attract have diminished considerably, resulting in ‘intellectual deficit’ and impacting quality of strategic brand management in many agencies.
Such a vacuum is to a large extent the creation of the ‘client industry’ (in other words the manufacturing and the service industry who employ ad agencies to promote their brands) who have over last twenty five years squeezed the ad agencies to such a point that while the advertising rupee spent by the advertiser may have been growing due to media spends and inflation, the agencies’ revenue % and the bottom-line growth have been considerably impacted.
However the ‘fault’ does not lie with the advertisers alone. Since last 25/30 years there has been a proliferation of ad agencies and all international networks now have their units in India. And many of them have multi-agency brands to cater to conflicting brands and clients of various budgets and specialised needs. And there have been numerous professionals (including me!) and even business houses who have opened their in-house agencies and all of them are vying for their share of the same pie.
As a result, there is cut-throat competition amongst agencies. On an average, a pitch for a large to mid-sized advertising business today attracts 10 to 12 agencies who are willing to go for a full-fledged pitch (totally speculative, without any compensation) and invest huge monies, resources and time to put up a good show. But unfortunately there can be only one winner and the winner takes it all. And the next step is that when the advertiser shortlists 3 or 4 agencies, he asks for commercial proposals. And that’s where the ‘real game’ begins. Fees and compensation models are squeezed by playing rates of one agency against the others and the ‘bidding’ starts.
I am not at all suggesting that in agency pitches quality of the pitch is not considered. In fact that’s how the short listing happens. Usually between the top 3 or 4 selected for the second round, there may be marginal differences in quality, and it’s easier for the advertiser to now negotiate and reduce compensation without compromising on the scope of work or the quantum or the involvement.
We agencies have become pliable and easy preys of such methodologies. Because competition is severe and new businesses are needed to survive and grow. So we accept the ‘best negotiated prices’ for ourselves and work with thinner margins. As a result to make both ends meet, corners are often cut when it comes to our expenses, a very large part (50% +) of which is invested in human resources.
In the past, there have been many noble and good intentioned efforts by the advertising industry led by Advertising Agencies Association of India (AAAI) to ask the member agencies to levy a pitch fee on the advertiser when he calls for a multi-agency pitch. Even formulas for the pitch fee concept were worked out by us (I was then the Member of the Apex Executive Committee of AAAI) several years back, but could not be implemented as many (if not most) agencies themselves violated the principle to be a part of the pitch. So the intended regulation to curb this practise and impose pitch fees on advertisers for multi-agency pitches came out to be a non-starter.
The crux of the matter is that the advertising agency business is wilting under major revenue pressures due to squeezing margins though the top line may be showing healthy growth for many agencies. And the unfortunate by-product of this malaise is that the quality of output (particularly in brand management & creative business) is directly linked to the quality and talents of the professionals employed by the agencies which in turn has a high co-relation to the compensation package offered by their employers i.e. the advertising agencies.
It’s a vicious circle that one has to live with, in our industry. Some advertisers (and they are a minority) do also realise that if they don’t pay well to their agencies, they too will suffer due to lack of quality professionals at their agencies ends. Gradually this realisation is coming amongst the more enlightened clients and senior agency professionals must do their best in creating this realisation amongst their clients that ‘if they pay peanuts, they will get monkeys’.
The author of this article is Tapas Gupta , Founder & MD – BEI Confluence Communication Ltd.
(This is an authored article and views expressed do not in any way represent the views of tvnews4u.com)