Your agency isn’t making enough money

Folks outside of advertising would be dumbfounded at how absurd some of the pricing practices in the agency business are. The tl;dr version of most legacy agency-client contracts essentially narrows down to ‘here you go, take a whole bunch of our employee hours to execute a truckload of your work’.

Say a pitch goes well and the clients have decided to sign on. If you choose to play by the prevailing (and commonly accepted) protocols of cost negotiation meetings, you’re handing back more than just a signed contract.

First, agencies are expected to share the basics. Staffing numbers, the type and calibre of staff assigned to the account, the overhead costs expected to be spent etc. However, procurement teams typically want more granularity.

And by ‘more granularity’ they mean actual individual employee salary data and the agency’s proposed profit margins to negotiate further. Negotiations are then based on finding a compromise on acceptable ‘man-hour rates’.

By the time it’s all done, agencies are precariously placed, with profit margins hinging on their staff consistently being able to pull off 1.5x, 1.7x, and 2x more work than what they’re actually capable of.

It’s tempting to villainise one side and assign blame unilaterally in these scenarios, but the reality is far more complex. Any pricing conversation is incomplete without acknowledging the clear dissonance in how agency effort is valued across both sides of the aisle.

Clients aren’t always getting the value they seek from most agencies and most of our work isn’t remotely transformational for their business in any way. So, the client’s procurement teams trying to achieve more favourable pricing are simply playing by free-market rules and the power imbalance.

It’s agencies, with our unimaginative business model or the lack of one, that are responsible for ending up signing deals that aren’t close to being commercially viable. The industry’s been cornered into submission over stone-age pricing practices that most of us still keep agreeing to.

The repercussions of these bad terms are mostly borne by the staff. But it also means misaligned incentives for the agency itself. To make up for all the bad deals, you’ve obviously got to pitch more.

Consequently, there emerges a dynamic where agencies prioritise prospective clients over those they’re already working with. Are the majority of our best talent being assigned to pitches instead of working on existing clients? Could this be contributing to sub-standard everyday creativity?

Over time, this cycle erodes confidence in the value of our own work. Messing with our own ability to negotiate improved renewal terms with existing clients. This then translates to below-par salaries and marginal hikes.

When the price is fixed on headcount and time-based charging, agencies aren’t incentivised to integrate automation in their workflow and show more efficiency either. We’ve put ourselves in an environment where the business model itself is to cut corners.

So, when an entire industry’s model is stuck at getting paid on billable hours, this endless loop of over-negotiated costs, thin margins, heavy workloads, prioritisation of effort over creativity, stagnation in innovation, and a propensity for cutting corners becomes seemingly inescapable. Everything that’s wrong in the agency business can in some way, ultimately, be traced back to the way we price.

There’s a reason why, as much as we love long-term brand retainers, we’ve embraced the project model at Talented. Because it demands a job-by-job focus on margins, they’ve kept us on our toes commercially. We’re able to assign internal teams sustainably and show agility by bringing on external partners.

We can truly sense our creativity and add more value by being able to focus more on sharper brand problems and less on insignificant daily output. More often than not we finish these projects with a sense that the pricing model fairly reflected both our effort and the outcome.

We’ve now been trying to extend the same thinking as best as we can on our retainer pricing. That being said, new market realities indicate that the days when agencies could build themselves by renewing multiple long-term, high-value retainer contracts over and over again are a fading memory.

There’s also a reason why we talk about our work the way we do at Talented. It’s mostly because we’re proud of it. But it's also because we want to keep shining light on the value of our creativity.

There are parts of our business where there's an opportunity for better cost efficiency. And negotiation. But creativity is different. We wrongly assume it’s a linear process and therefore can be made more efficient. It can’t. Simply by nature, creativity is often at odds with efficiency.

So, at Talented, we often like to publicly go, “Hey, here’s what those 30 seconds of fun on video *actually* took to create!” In an industry that’s been trained over decades to commoditize creativity, we think there’s high ROI in doing that well. We’re not looking to monetise ‘time spent’. We want to keep figuring out how best to monetise and capture value from how our skills deliver impact.

My co-founder, PG, puts it best. “Better creative work is the fastest way to price ourselves higher.” This isn’t about arbitrarily charging more. Our prices move up only if clients see transformational value in our creative and strategic chops. If they clearly identify that these spends will prove to be pivotal in their business’s success.

Truly great ideas are rare. In a marketing landscape where distribution and productivity are increasingly commoditized and abundant, human creativity will emerge as the differentiation - a truly scarce resource whose value will always be on the rise.

The guest author is co-founder and CEO of Talented, a creative agency.