When cost is more important than marketing value

Darren Woolley

Darren Woolley is Founder and MD of TrinityP3, an independent strategic marketing management consultancy that assists marketers, advertisers and procurement with agency search and selection, agency engagement and alignment and agency monitoring and benchmarking. With his background as an analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

While in Brussels for the WFA Global Marketing Week, I was asked for my opinion on how the phenomenon of cost reduction was impacting the processes of creativity and innovation. This made me think about how over the last few years I have seen first-hand, many instances where cost cutting became the dominant strategy, instead of being value and results focused.

Ever since the beginning of TrinityP3, we have refused to go down the route of cost cutting. This is because we know the consequences mean heavily reduced value and effectiveness for any campaign. When you reduce the advertising and marketing budget, you reduce quality.

“Cutting costs without improvements in quality is futile.” —W. Edwards Deming (1900–1996)

The three most common examples are:

  1. Media cost over media value
  2. Reducing the agency fees, causing a reduction in expertise
  3. Focusing on price, causing increased cost

These three instances are actually based on real examples from my experience and in the interests of confidentiality I have altered the following so they are unidentifiable. But I am sure that if those involved are reading these examples, they will recognise themselves.

Media costs over media value

I was talking to the CMO of a global consumer goods company when he asked me for my views on the media agency he was currently working with. He doubted their creativity and initiative and wanted to see whether I agreed. This surprised me as I knew the agency had a good reputation within the industry and many satisfied clients.

I queried him on the details of remuneration as I thought there might be something amiss here. What I found was that the agreement they had with the agency was one of small margins with a substantial bonus payment if the agency managed to deliver an aggressive cost per thousand or CPM goal.

Typical of many global, and sometimes local, media agency deals is a focus on providing a bonus to the media agency based on achieving lower media costs and one of the easiest measures of media cost is CPM. The problem is that a media agency can achieve low CPMs by buying low quality inventory and avoiding the high quality, premium media environments that attract a premium price and therefore drive up the CPM.

I questioned the CMO on what his disappointments were with the company and why he thought they were performing poorly. He cited that he almost never saw their own spots on air, all he had seen were his competitors. This was frustrating him, as after their considerable investment he expected to see the fruit of their efforts. Another factor that was disappointing him was that the agency seldom came forward with innovative sponsorship or media properties.

I asked him what times he regularly watched TV and his answer turned out to be from 7.30 pm onwards, after he got home from the office. This time is the premium for both viewers and rates. If the agency wanted to get their bonus by getting a low CPM, there was no way they could schedule at this time. But clearly the competitors did not have the same limitations.

Likewise, many of the exciting and interesting sponsorship deals are for premium properties and these invariably come with premium audience delivery costs. Even though they can provide excellent value in positioning, awareness and brand association, the measure of cost of audience delivery, CPM, does not take any of this into account.

Here is a prime example of where measuring cost and providing an incentive to lower cost has eliminated the opportunities to embrace the media value, leaving the brand in the bargain basement.

Reduction of agency fees at the expense of expertise

I was recently contacted by a global entertainment company to discuss undertaking a media agency pitch. They were concerned about the agency’s subpar performance in the previous year as well as a lack of strategic input and their high turnover of staff on the account.

These are obvious symptoms of potential remuneration issues and so I suggested to the marketers we undertake a remuneration benchmarking prior to the pitch to get a baseline of the level of remuneration. Sure enough for the level of spend, the mix and complexity of the media requirements the agency were paid about 35 per cent less than benchmark.

Interestingly, on bringing these findings to the attention of the marketing team, we were informed that 18 months earlier the regional procurement team had benchmarked and reduced the agency fee by 30 per cent. The agency accepted the reduction in the fee as the alternative was to have to defend the business in a pitch.

In order to function with a 30 per cent reduced fee, the agency effectively removed the senior account management and media strategy and planning from the account replacing them with the resources they could afford. They did not touch the buying / trading function as this is the area that was regularly checked by media buying audit.

On the basis that the average media agency fee is between 2.5 per cent and 4 per cent of media spend, they had effectively saved 30 per cent off the agency fee and effectively put the 96 per cent – 97.5 per cent of the media spend at risk of underperformance. The problem is that they did not know this for 18 months as the only thing they were measuring was media buying cost and not the media value delivered.

Focusing on price leading to increased cost

A financial services company had appointed an agency and commissioned us to assist with the negotiation and benchmarking of the proposed agency fees. A year later the contract was being reviewed by the company procurement team and I received a call from the procurement lead.

He was reviewing the production rate card and was questioning the rates we had negotiated. In his experience in the print industry, he was aware of studio rates less than half of the rate we had negotiated. In the conversation I pointed out that the advertising agencies were typically more expensive than the production houses associated with print companies and brokers. The reason is that the agency is developing the creative work and that typically they utilise a better calibre of studio artist / designer.

He disagreed with my reasoning and believed we didn’t understand their lower cost objectives and that the benchmarks we gave were inaccurate. The procurement lead went on to negotiate further with the agency without us, and returned to gloat about his successes. He had managed to drop studio costs from $180 to a mere $90 per hour and was proud to tell us that this had saved his company millions of dollars in artwork spend.

This was a significant reduction in costs, and knowing there must be something else at work here, I asked to view the rest of the rate card. I was right in thinking there was more to this dramatic price drop. On the rate card was a new charge for the archiving and retrieval of files of $90 each. This is interesting as anyone who is proficient in programmes such as Apple Mac OS or Adobe In-Design will know that this only requires simple keyboard shortcuts, not something worth $90 each time it is done.

I knew that the majority of the jobs the client was using the agency for were only modifications and corrections, and I also knew this was something the procurement lead was not aware of. This type of work is usually billed in 30-minute segments and because there were a large number of various stakeholders, they outnumbered the longer base artwork by 5 to 1. This was to have a large cost implication.

The system that we negotiated had a price of $180 per hour, and with most jobs being billed at 30 minutes, each cost was $90 each. With the new system the head of procurement had negotiated, the same jobs now cost $45 but on top of that was a fee of $90 for file retrieval and another $90 for archiving – a total cost of $225. By reducing the hourly fee by half at face value, procurement had in fact raised the overall costs by 150 per cent in more than 80 per cent of studio projects.

Even worse, because there was a perception of reduced costs, jobs were now being sent back through the studio to be revised, incurring further costs. The strategy did not actually save his company over a million dollars. In reality he had cost them a lot more by focusing on the price and not the cost or the value to the company.

Price, Cost or Value?

These examples are only a selection of the possible outcomes that can happen when you become focused on price or cost over value. Marketing is inherently value-based, but today much of the debate is about cost and price. The results of this are often counter to the true objective to be more efficient and cost effective.

Have you had any instances where trying to lower costs have in fact increased them, or have resulted in a loss of marketing value?

Tags: agency management

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