Why marketing and their agencies will always lose to finance
By St John Craner
Marketers and their agencies need to stop defending spend and start creating value. Until they do they will always be seen as a cost, rather than an investment, and sent to procurement to be squeezed. So isn’t it time to stop complaining and start changing?
Having just spent time recently in Sydney and Melbourne it’s become obvious that the current model of retainers and paying for a set number of agency resource hours is flawed. If agencies and their marketing clients continue to work on a model of input (hours) and outputs (campaigns), as opposed to outcomes (sales, profit, margin, reduced churn), they will always lose.
It’s the law of diminishing returns. Marketers, based on the current model, are having to pay their agencies more to get less. More clutter, less cut through. More hours, less results. The Result? Budget cuts and negotiations with procurement. And then the whole ineffective cycle starts again (assuming you retained the account at pitch).
Hard vs. soft metrics
Marketer’s current behaviour is reinforcing a model that doesn’t work. “We’re not getting the results we need so we need to spend more with the agency and media.” Right? Wrong. With this mode of operation, unless you’re focused on the hard metrics like sales, margin, profitability or customer churn, you’ll continue to end up with weak defences and soft measures like brand awareness, likeability and preference. Unless any of these metrics can be linked to profitability or ROI they are meaningless. Until marketers and their agencies look at these harder metrics, just as finance departments and CFOs do, they will never be able to argue credibly for a bigger pot.
Sales and share are good but at what cost?
Achieving sales or increasing market share might be good but this doesn’t mean at any cost. The cost to business might be margin. If you secure 10% lift in sales but if this comes at a 12% reduction in margin the profitability factor will not please the bean counters as it’s not sustainable and you might have attracted a newer, less profitable customer and alienated your existing higher paying customers in the process.
We all know any salesperson can make their month end target if they drop their pants. Problem is they sell on price, not value, and this causes a precedent-setting, suicidal spiral for their employers. Short term gain, long term detriment. The customer then knows they can negotiate on price next month too and that’s dangerous territory for margins.
More from less
Apple are beating Nokia on sales and profit even with less than a tenth of their market share. Strategy Analytics (US) reported that whilst Nokia earned an estimated $1.1 billion with 35% global market share, Apple earned $1.6 billion with 2.5% market share. Apple are making more money from less share because their perceived brand value, and thus pricing strategy, is high.
It’s a much easier argument to ask for more budget when you’re making money because you’re seen as an investment rather than a cost. You’re proving ROI. It’s a much harder sell when you’ve reached the end of financial year and the big integrated TV campaign hasn’t achieved the results the company needs.
Can you imagine being the CFO and having to sign a bonus cheque just because an agency performed to “highly satisfactory levels” based on the soft performance survey you agreed to. Service isn’t a performance driver, it’s a hygiene factor. It’s what good clients already expect. If the agency is driving an improvement in profit, sales and market share (the ultimate value equation) you could almost guarantee finance would be getting their cheque books out well beforehand asking you how much more you need to create more value for the company and their shareholders.
The New Solution: Collaboration not Competition
The current model of one client with many specialist agencies (PR, digital, media, advertising, design, search) means instead of collaborating agencies compete for, rather than grow, a shrinking pie. This “we can do it all” behaviour isn’t in the client’s interests. It’s in the agency’s interests. This is because agencies need to fight for a bigger slice of the shrinking pie in order to survive and stay viable.
So how about this for a solution to grow value: why don’t agencies collaborate and work together, rather than compete, to create a bigger pie they can all share in. Better still a bigger pie that has a bigger central bonus pool. This new model means that all agencies are aligned by a common binding purpose that benefits both them and their client. Bigger budget + bigger bonus pool = greater collaboration to achieve hard value-driving results. A result all round.
All of this might explain why CEOs almost always come from an accounting or financial background rather than a marketing one (a ratio of 3:1 in the UK). This means marketing often isn’t round the table when they need to be. This translates into a lower share of voice and the marketing department often end up being marginalised, misunderstood or challenged when it comes to the hard investment calls especially right now.
If marketers and agencies could work together to focus more on the hard metrics of margin, profitability and ROI vs. the soft measures of brand awareness, loyalty, preference and consideration they might just end up talking bigger numbers with the CFO, rather than smaller ones with procurement. If marketers and their agencies could define and prove real value in the same way finance departments do they might just get back round that all-important table.
St John Craner helps businesses market themselves better through his company Distinct  and is Business Director of International marketing management consultancy firm TrinityP3  helping clients maximise value through agency relations and remuneration.