Originally shared here by MediaPost.
As the pandemic and its effects continue to reshape every corner of our society, discussions about what the future of agency business looks like post-Covid-19 continue to rage on.
All aspects of agency life are up in the air, from workflow to creativity concerns—to more pragmatic questions around the need for real estate.
While each of these concerns have merit and remain unclear, one thing is certain: The agency of the future must become a profit center for its clients. This may be an overly simplified statement, but it provides important strategic direction for all shops—big and small—who are trying to determine how they grow in this uncertain marketplace.
Now, more than ever, clients need partners who can find ways to make them more money. End of discussion. The debates over the importance of scale, pricing models and payment terms matter little when a client is focused on preserving its own business.
The pandemic has accelerated the demise of an industry already struggling to define its long-term future. But the ambiguous agency landscape is not all doom and gloom. While archaic agency models may struggle to pivot, a new generation of more nimble shops are becoming the trusted alternative for brands.
Why? Because of their willingness to be held accountable with pay-for-performance structures, directly incentivized by increasing sales. The uptick in D2C and e-commerce outreach during the pandemic economy interjected pay-for-performance agencies into the sales equation. This performance-based approach is something traditional agencies, who are built to deliver softer brand objectives, are not equipped to execute.
This new generation of agency staffs themselves with a blend of skill sets: e-commerce, media planning, data analysis, search execution, content strategy, and social media. With expertise in these crucial skills across the collective teams, they are able to work side-by-side with client demand generation teams. This symbiotic relationship creates profit centers within a client’s business.
The result is a reliance on these performance-based shops to drive revenue. This type of success cannot go unrecognized, and high-order relationships, which may have been chased for years, begin to happen organically. The reward is a transparent, sustainable and profitable partnership for both parties.
Agencies built to be their client’s profit centers are obsessed with sales goals—not media or creative outputs. These shops embrace the pressures associated with having their future tied directly to the performance driven for clients. While this pay-for-performance strategy is certainly not easy, it is worth the work. By becoming an integral part of the revenue center for a client’s business, these agencies have more opportunity to shape corporate strategy with a company’s broader management, and not merely the marketing team.
Media expectations are changing, and agencies need to keep up.
Clients now expect a $20 million budget to deliver like a $40 million one. Old agency models simply cannot keep up. They’re accustomed to longer planning cycles tied to a global rate card agreement, finalized with the backing of big media players (often TV companies) that give them pricing clout. The problem is the pandemic has launched a new reality, and it looms overhead for the long-term profitability of big agencies: Few clients want to commit to annual budgets, given this moment of economic uncertainty.
They’re choosing flexibility instead, and they need results now. Therefore, the clout and margin created in the float that big agencies have always relied on is disappearing. It is being replaced by a month-to-month approach that can incentivize agencies who are comfortable with pay-for-performance agreements.
This also has an impact in the heart and soul of these big agencies, which is creative execution. Gone are the large creative retainers with cushy billable hours buckets. Creative requests are being replaced with project-based work, creating less financial flexibility for these big agencies.
Integration over siloes
Another important part of becoming a profit-center agency is the abandonment of legacy structures. Profit center shops don’t have siloed teams. There is no in-house bickering over budget allocations. They are comfortable with the data analysis and fast-paced decision making that is required to pivot with their client’s customer changes in demand.
These smaller, cross-trained squads are driving a sea change that is occurring in the business. Big agencies, even those who made large investments acquiring data behemoths or those who are building ad-tech consultancies inside their holding companies, remain underpinned by singular media decisions, siloed teams and buying clout built on a legacy model of television.
With the pandemic forcing brands to do more with less, traditionally soft KPIs of awareness, brand lift and impressions simply no longer make the cut. Sales, profitability and moving products that grow the business are now paramount. While traditional agency teams interface downstream with a client’s creative, media, search, social and content teams, and occasionally the CMO, shops built as profit centers are integral to the day-to-day success of the company. They speak daily with C-suite executives, and have earned the trust to help shape business strategy in real time.
These new age shops are also not found in the typical big city environment like New York, Los Angeles, San Francisco or Chicago. They’re operating in Nashville, St. Louis, Minneapolis, Dallas—or they are entirely remote. Profit center agencies are now consulting on product pipelines due to their understanding of margins. They can help answer questions like why some products aren’t worth manufacturing at all due to difficulties scaling. They can influence more pieces of a business than simply where the ads will deliver. Ultimately, these firms are a new emerging vanguard of advisors, providing a point of view that clients have been missing for a long time. While the pandemic has brought disruption and tragedy across the globe, those who are willing to pivot and embrace a profit center mindset could be the silver lining in what has been a looming cloud of poor health in the traditional agency model.