Low remuneration, unsustainable agency P&L, low talent cost, unspectacular agency output… how can one break out of this vicious cycle? With the fragmentation of media (starting in the early ’90s), brands needed to move beyond top dailies/ TV channels to a multitude of media options/ vehicles within each. Brand marketing expenses presently had to take care of ATL/ BTL/ Digital/ PR/ Events, etc. and brand margins came under immense pressure.
The 15 per cent agency commission was questioned and clients wanted more for less. This was the same time when agencies decided to split the media and creative businesses – clients started paying media and creative agencies separately. With clients pushing agencies on remuneration, agencies found the going tough. They had to find new revenue streams – ‘design’ at creative agencies, ‘analytics’, ‘digital’ etc. became separate products at media agencies. The going has been tough for agencies ever since.
Signs of stress:
- Huge talent exodus at agencies and focus on skill up-gradation
- Increased frequency of pitches
- Transparency Report by ANA (USA) and a new agency contract template by advertiser body ISBA (UK)
- Newer business models and entrants emerging – consultants like Accenture, Deloitte, EY, KPMG, and even McKinsey – into the Digital Marketing and Creative/ Media Agency business
Root causes and the solution: Agencies are an integral part of the marketing ecosystem and need support from the client marketing function to survive/ add value to brands. When marketing plays a proactive role in brand growth, agencies find it easier to support brands and marketing. When the narrative turns defensive, agencies and marketing teams are constantly pushing each other to defend their positions, their roles and their work. In the quarterly results-focused corporation of the 21st century, brands are milk-cows that must lactate from Day 1. It is imperative that marketing builds ROI into the brand life-story at each stage of its life; fully prepared to answer questions on input vs output.
It goes without saying that agency partners must build competencies that help marketing teams build ROI arguments into every brand initiative.
In sum, a proactive/ ‘front foot’ narrative ensures that agencies and their clients stay ahead of the game at all times.
A good start:
We believe a good start can be made when agencies build a virtuous cycle of ‘profitable agency remuneration – good talent and tools – good agency output – better brand growth/ profits’ that’s not defensive in its approach and has the full backing of the marketer. Transparency is a key ingredient to making this work. It lies with both, agencies and their clients, to find a way to begin this cycle.
Evidence elsewhere:
Premiumization of the Indian smartphone market is a good case in point. Smartphones have become an essential part of life for most urban Indians. After the first stage of experimenting with low-cost/ indigenous brands, mass consumers have now graduated to Chinese brands that are costlier and more technologically advanced than the earlier, cheaper phones. In an acutely price-sensitive market, average selling prices of smartphones moved up by 6 per cent (2016 over 2015) and rose by 25 per cent to $157 (USD) in H2 2017 – the ‘mid-range’ (in pricing terms) has itself moved up.
There are two hypotheses for this:
- Having tried different types of phones, consumers have realized the value of buying a costlier phone – better features, faster processors, more memory, smarter looks and most important – longevity.
- Category evolution has moved to a stage where quality matters and consumers are ready to pay. Hence, phone manufacturers are taking the risk of using better ingredients/ higher prices instead of ‘competitive’ prices/ fitting ingredients.
This trend is also visible at the higher end of the category. Korean and American smartphone brands have achieved far greater penetration (with their premium offerings) than ever before.
In sum, the entire category (from feature phones and basic smartphones to premium phones) seems to have moved up in Average Selling Price over the last three years. People like the better price-value equation and it is a virtuous cycle that will only help category growth/ technology offered.
Indian Pharma industry evolution:
India’s Pharma industry met its darkest hour when the USFDA sounded an ‘Import Alert’ against a major Indian Pharma company in 2010-11 and slapped a $500Mn (USD) fine/ settlement on it thereafter. This became a turning point for the $45Bn (USD) Indian Pharma industry.
Quality-by-design, Automation (lower scope for manual interventions), increased manpower in quality departments, Quality Assurance and Control (QC), and stricter compliances are now the order of the day. Better regulatory compliances have led to better processes and products, lower recalls, lower wastage (of man-hours and material) and finally, better profitability.