Saturday, November 24, 2007

Agency Selection Process

Marketing, Money and More Issue 2 (11/24/07)

Agency Arithmetic
Let's do some math. Say an agency has 30 staff members that work 40 hours per week each. That's 1,200 hours per week and there are 52 weeks per year for a total of 62,400 total hours each year. Agencies don't sell products, just hours. That is their inventory. Those hours are spread out amongst different departments and disciplines. There are also lights, a building, power, computers, research tools and subscriptions, seminars, classrooms, chairs, toilets, water, books and other related expenses that lead to a bottom line number that has to be spread and charged to the 62,400 hours available to sell to clients. It is a basic matter of running a business, it must be profitable but there are industry practices that drive up the expense for everyone.

Rolling the Dice

The average agency will do many "pitches" for work. Hours will be spent putting together these pitches. If the average agency wins 1 in 7 pitches, that is 6 pitches where the hours are written off. An agency could easily spend 100-200 hours on a major pitch. That reduces the available inventory of hours. Some agencies can be very selective about how much work that they will put toward winning a client's business and some have to just to compete. This is an industry standard that stems from the ambiguous nature of marketing. Since we aren't selling widgets, clients want to see what they are buying. There is no other way to show them the product than to do the work. Every pitch is a gamble and there may not be any return on that investment other than a letter thanking you for your effort. At the end of the day you gave away your best ideas, learned about a company that you will not be partnering with and have lower morale than when you started...But when you win, it's that much more rewarding.

Agency Selection Process
I have been through pitches for clients that have $5,000 per month to spend and pitches for clients that have millions. It then makes sense to give it your all for the ones that have millions and do a minimum amount of work to win the small clients, right? If it were that easy, I wouldn't take the time to write this. People watch too many movies. Not every client needs to go through the same process. Here are a few tips:

  1. Assess what your account is worth to an agency in a dollar amount per year or month.
  2. Have an expectation of what marketing can do for your business, even if it is wrong.
  3. Do your homework. Read a few case studies within your industry.
  4. Ask yourself what sort of agency culture will work best with your company.
  5. Start out online and ask a few people in your industry for recommendations.

Now, what was your answer to #1? That will help you know what size firm to be talking to. Chiat Day will not speak to you if you have $5,000 per month, but a small consulting firm or PR firm will.

Size Does Matter
Now that you know you are talking to the right size agencies, do some homework. Ask for some references and their materials with a few case studies that match your business' situation. Once you have narrowed your seach to just a few candidates, call for a casual meeting with a represenative from each candidate firm at their office. Be upfront about your budget and your situation and let them come back to you with a proposal. Tell them your expectations in terms of what you want to see such as costs, spec creative, recommendations, etc. It is also important to let each firm know that you are talking to more than one firm, they will need to decide if they can accommodate your expectations. Firms do get short staffed, although most would pitch for the new business regardless.

How do you know if you should be seeing creative done "on spec?" Here are some ranges based on my experience:

  • $25,000 Annual Budget = Proposal with broad recommendations, case studies, etc
  • $100,000 - $300,000 Annual Budget = Proposal with specific recommendations, case studies, etc.
  • $500,000 + Annual Budget = Full agency pitch with recommendations and spec creative

These ranges are based on total annual budgets. It is difficult to quote because of the amount of money that may be spent on media or production. A $5,000,000 budget can translate into less than $1 million in agency revenue if there is a heavy media spend. The best course is to ask each agency how they will be demonstrating what they will do for you. If 2 out of the 3 agree to go to the next level by writing up some recommendations and showing creative, then you are most likely a valid client that deserves that respect. If all agencies pass, it is because the potential return on your business does not qualify for a pitch process. In this case, you may go back and rethink your position on what you would like to see.

Agencies Investment
An agency will invest time into learning the client's business. Marketing directors tend to want to reduce their rate over time. Agencies tend to want to reap the benefits of having learned the clients business and therefore reducing the amount of time spent on the account.

If you have found a firm that produces results, you must look at every dollar spent as an investment. Look at your P & L and share pertinent information with your agency. If the agency is performing, then a reward is in order, not a lower rate. Agencies are in business also. If they are receiving a fair rate with bonuses for performance, you probably have a very involved and motivated agency.

Outlining the Relationship
Retainers are great...for one of you. If your agency receives a monthly retainer for services and your workload is up and down, then you are paying for a block of time that does not get used. If the retainer dates back to 1997 and has not increased over the last 10 years but the workload has, then the agency loses. Here are a few fair potential scenarios

  1. Min/Max Retainer - This scenario is based on a range. There would be a minimum and a maximum. The minimum might be $10,000 and the maximum might be $30,000. The agency could charge anywhere within this range based on usage but it gives an expecation on both ends for cashflow.
  2. Performance - This scenario would allow the agency to truly be a partner in success. Goals are set for each campaign and performance bonuses are dispersed to the agency when they help achieve specific goals. A basic retainer would be attached to this for maintaining the account.
  3. Account Planning Retainer - This scenario pays for account planning and account service on a monthly retainer. Strategies are developed ongoing and execution is done a "per project" basis.

These are just a few scenarios that give a bit more controll over spending than a traditional retainer. Some clients don't want account planning, but I feel that it is the strategic thinking of an agency that differentiates it. Otherwise you are looking for a specialty firm like a creative shop or an interactive boutique.

The point is that it is very costly in terms of time and expense to choose a firm that doesn't fit your business. Choose carefully and make sure you conduct an appropriate process in your selection. If you feel like you need someone to guide you, there are plenty of consultants out there and when you are talking about managing millions of marketing dollars per year, it's worth it to choose wisely.

If you want to add a few scenarios or throw out a situation, please do.

Thursday, November 22, 2007

Branding & Marketing: How to Select a Marketing Firm that's a Good Fit for Your Company's Needs

I read over this blog and it is valid and supports what I believe is a good start when searching for a firm.

Branding & Marketing: How to Select a Marketing Firm that's a Good Fit for Your Company's Needs

$10,000 for an Ad Campaign?

Marketing, Money and More - Issue 1 (11-22-07)

I have been with Virgen Advertising for 4 years, 3 of which I have been the lead business developer. We are a mid-sized Vegas agency with small accounts that spend a few thousand dollars here and there and very large accounts that spend millions of dollars annually. I have had clients from Strip casinos to the mom-and-pop's running a corner restaurant. The question keeps coming into play over and over and over from all size clients and there is never really an answer that seems to pacify everyone.

Why does and ad campaign cost $10,000 to create? Did it really take your artists that long? The creative concepting time seems a bit excessive, can't you just spend less time on it?

I do my best to combat these questions and the answer can involve one or all three of the following:
  1. Value
  2. Time
  3. ROI
Ad agencies employ various techniques when pricing their services. Hourly rate, total estimated project cost and value.

Hourly Rate
When a service is ongoing such as public relations or strategic planning, an hourly rate is applied. Marketing is endless. There is always more you can do, but there is usually a budgetary restriction that tells us what an agency can accomplish for a client. If the client asks, "How much should I spend on my marketing monthly?" My answer is, "Well... you need to spend what makes sense to remain profitable and reach your growth goals." Agencies will maximize every dollar you give them. It is up to the client to say, "I have $50,000 dollars and I want to increase covers in my restaurant by 30 covers (restaurant lingo meaning table customers) a week."

Wow! A dollar amount and a goal. That's all we need. I would then tell the client that with such a limited budget, we should try public relations and lifestyle marketing to increase word of mouth and get some good press on the food, chef, ambience, etc. We would need a minimum of 30 hours per month to work on this, so a retainer of roughly $3,000 - $4,000 would be sufficient to cover the amount of time our professionals would spend selling the local media on the client's restaurant. At that hourly rate, we would eat up the budget in a year. We may even recommend scaling back PR and employing some offer-based direct marketing to promote sampling. You begin to see how there are varoius ways we can apply a budget. This leads us to the next topic...

Value of Service
When we talk about creative, we are talking about art. What makes a Picasso worth millions and my water color paintings worth less than the blank piece of paper I started with? The answer is the amount of people that find the Picasso appealing and the laws of supply and demand. Now I'm not saying that ad agencies are pumping out masterpieces, BUT they are bringing appeal to your message through the use of images and text that connect with your target emotionally. What's that worth? My watercolor painting is awesome to me, but the world wouldn't pay a dime to have it. It's worthless and will not capture the attention of anyone. It can't be used to deliver a message.

In our example, we talked about a restaurant. Let's say the agency quotes the restaurant $10,000 to do a print campaign. Did it take 100 hours? The final ad probably didn't. The 30 versions prior to getting to the final probably took a chunk of time. Are we using pictures of food from the restaurant? Do we have any? Will there be a photo shoot or will we look for stock images? STOP. This is where it starts to spin out of control for the small restaurant owner. If you are a restaurant that is losing money (as is industry standard in the first year of operation) then this may not sound like such a good idea, but if you are a restaurant chain and you have 5 locations, this may be a great idea and worth every expense.

The point is what? Although each client will have varying hours to develop an ad, we charge $10,000 to put together a branding campaign. The market across the country says that $10,000 is what a branding campaign is worth. Somewhere in there the agency costs are covered and somewhere in every agency business plan is something about profit so there is some of that accounted for. Negotiate. Tell the agency what you are willing to pay. If you don't like their work that much you should probably be talking to another firm anyway; however, if you love their work and they have case studies and references proving that their creative expertise sells then you as the client need to decide if your brand is worth the expense and if it has value.

ROI Is the Answer
Return on Investment (ROI) or Return on Opportunity (ROO) are what should guide client decisions about marketing. If a campaign will yeild no returns, do you execute it? Probably not unless the wife of the owner likes the color blue and puppies and wants to see her last name on a billboard. Look at your annual revenues and ask yourself, "What is the maximum amount I can spend if I want to grow by 20% this year?" That is a key question. It has a goal attached that can be used to calculate a dollar amount. If you are a start-up, then this is probably mapped out in your business plan. Now you can go to an advertising agency with a marketing budget and a sense of what ROI needs to be obtained from the spend. The agency will tell you if they think your budget can achieve your ROI goals. You may need to adjust based on recommendations.

All Firms are Unique
There is very little that is uniform in the marketing world. Standarization occurs where it can, but "best practices" are not always established for the ever-changing world of advertising. Match your business with a firm that complements it. If you have $50,000 a year to spend, then you probably aren't talking to Young & Rubicam. You are probably speaking to a small-to-mid-sized firm with less than 50 people. The larger the agency, the bigger the building, the more equipment, the more toilette paper, the more books, the more media research subscriptions, the more payroll, the more, the more, the more. Costs of providing the tools and space to manage all the various disciplines of marketing go up with agency size and that affects rates and prices. A good agency cost more just like a good interior designer costs more.

You Get Out What You Put In it
Each agency will have its own process. A good agency will spend many hours and involve multiple people in the creative process to deliver the very best ideas to the client. Another agency might allow one guy to spend 2 hours and you get the best idea that came from that one person in that short time. I don't care how creative that one guy is, he needs time to think of ideas. You get what you pay for. More time usually means more creativity. The one who spends less time will be able to charge a lower price in less time at the cost of mediocre creative at the end of today. If mediocre is appealing to your audience, then go with it. I've seen it work. If your brand demands the very best and your audience will judge you by the level of your branding, then you will end up paying for the extra time. Now you begin to understand what price speaks to.

A firm of 5 people that can charge $200 for a print ad can't be compared to a firm that has 50 employees and charges $10,000 for a print campaign. Price cannot be the sole factor in this decision. There has to be a fit in so many other places as well as countless other considerations. Do your homework.

I will be posting more and more about these issues in order to educate business people that haven't had enough experience with agencies to know what they need to know. I've seen a lot of people get burned and then they don't trust agencies and every nickel on an invoice becomes and epic battle. The next post will be on agency selection processes.