Understanding the Economics of Digital Compared to Traditional Advertising and Media Services
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MG18 A Marketer’s Guide to Understanding the Economics of Digital Compared to Traditional Advertising and Media Services By Joe Burton Marketer’s Guide Series A Marketer’s Guide The material you have downloaded from the AMERICAN ASSOCIATION OF ADVERTISING AGENCIES, INC., is copyrighted and therefore protected by law from unlawful copying. Photocopying or reproduction of the material is strictly prohibited. A publication of the AMERICAN ASSOCIATION OF ADVERTISING AGENCIES 405 Lexington Avenue | New York, NY 10174-1801 Main: (212) 682-2500 | Fax: (212) 682-8391 E-mail: [email protected] | Web site: www.aaaa.org Copyright © 2009 JOE BURTON, MCCANN WORLDGROUP AMERICAN ASSOCIATION OF ADVERTISING AGENCIES All rights reserved. No part of this publication may be reproduced or transmitted by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission from Joe Burton & the 4A’s. 1 Table of Contents Introduction and Acknowledgement 3 1. Executive Summary 4 2. Brief History: The Digital Marketplace 7 3. Economic Drivers and Average Agency Costs 11 4. Effective Commission Rates/Breaking With the Past 13 5. Labor Intensity (Cost Versus Value) 16 6. The Production Process 24 7. All Tactics Are Not Created Equal 27 8. Debunking Common Myths 32 9. Recommendations 37 About the Author 40 Author’s Acknowledgements 41 Appendix I: The Digital Ecosystem 43 II: Expanding Digital Opportunities 44 III: Glossary of Digital Advertising Terms 45 2 I Introduction & Acknowledgement Since 1917, the American Association of Advertising Agencies Joe Burton has spent a 20-year career in operational/financial (4A’s) has provided guidance to marketers on various aspects roles working with Fortune 500 clients. Mr. Burton has a of the industry. For the past several years, our industry has unique advertising perspective with a career spanning many been facing its most significant change since the invention sides of the industry, including consulting, media owner of TV—the migration to Digital. and in managing global creative, relationship marketing and media agencies at the highest level in our industry. Web 2.0 has accelerated marketers migrating more of their budgets into the Digital space. It has also increased friction This new booklet includes an overview of the differences between clients and their agencies as traditional practitioners between traditional and Digital spaces, the impact on media, on both sides get up to speed. This is particularly true with production and agency resources/fees and recommendations respect to understanding the increasing complexity and the for dealing with this complexity. The booklet includes actual blurring of lines between media, production and agency advertiser examples throughout, perspectives from industry services/fee budgets and the significant economic differences consultants and investment analysts and a comprehensive between traditional and Digital spaces. glossary of Digital terms to assist all practitioners with the rapidly expanding nomenclature. Most of the publications in the Digital space have focused on the changing landscape and “what’s possible” aspects of The 4A’s thanks Joe Burton for sharing his expertise and the industry. However, none have addressed how it works insights in this book. The Association also thanks the clients, and what it costs relative to the traditional world. Accordingly, agency executives, analysts and consultants who contributed the 4A’s asked McCann Worldgroup agency executive Joe or participated in conversations with Mr. Burton. Burton to author a new publication to address this important topic in greater depth than in prior industry publications on the subject. 3 1 Executive Summary This document provides a reference tool for marketing Although the issues noted herein certainly apply, project-based practitioners to better understand the Digital marketing businesses such as PR and direct marketing have enjoyed a space with a focus on advertising and media agency services. slightly easier transition into the Digital world. As the labor required to service Digital increased, so too did their project As the world continues to move rapidly into the Digital fees and output rate cards. This organic transition did not age, advertisers and their agencies are facing an increasing occur for advertising and media agency services, which tend challenge— understanding the operational and economic to be based on annual retainer fees. Those retainers often are ramifications of migrating traditional creative and media benchmarked by comparing them against media spending, an thinking and approaches into the Digital era. This challenge outdated practice carried over from the days of commission- often creates friction, inefficiency and waste in client/agency based agency remuneration. relationships as traditional players on either side, or both, apply traditional practices (or expect traditional outcomes) without an understanding of very different Digital norms and economics. Without some basic knowledge of how the industry is changing, it’s easy for client and agency to become locked in the same recurring and painful conversations. 4 1 Executive Summary The primary focus of this booklet is to examine the shifting There are four primary drivers that contribute to the landscape in Web 2.0, explain the cost and servicing (seemingly) higher costs of Digital advertising and media differences between traditional and Digital spaces, and provide agency services when compared to traditional marketing insights to help ease the migration for traditional practitioners services: at both advertisers and agencies. A number of common myths 1. Growth in labor intensity, driven by an increasing are debunked and the following recommendations are also volume of assets, technologies required and complexity explored in some detail: of the process from creation through measurement 1. Educate your marketing partners about the differing and continuous engagement economics between traditional and Digital, especially 2. Shift from external third-party production resources budget holders to in-house agency resources 2. Manage media, production and agency staffing/fee 3. Blurring of lines between media, production and budgets (“investments”) together versus in silos agency services 3. Recognize the need for a continuous strategic planning 4. Establishment of new job functions and organizational and research process and build in flexibility structures within agencies and client organizations, 4. Resist the temptation to involve all disciplines, just with related supply & demand cost ramifications. because they are interested 5. Going Digital all at once may not be realistic; tier campaigns and markets and set realistic goals 6. Educate your procurement partners to avoid The high-volume, low-dollar, recommendations that may not be in the best interest high-complexity nature of Digital of advertisers programs makes it the most 7. Keep agency resources focused on the work, not on labor-intensive medium in the attending meetings 8. Visit your agency to better understand the Digital advertising industry. process first hand 9. Avoid the “shiny new toy” syndrome. These issues require resources and drive a cost of providing Digital is unlike any other medium and should not be viewed basic Digital services that is directionally double that of using traditional benchmarks. The effective commission rates traditional “full-service” agency fees, when expressed per or reach and frequency targets used to measure traditional dollar of media spend. If traditional services are assumed to mediums have virtually no correlation to Digital. The inputs require staffing and fees that imply an effective commission and outputs are not comparable. The high-volume, low-dollar, rate in the range of 12%–15% (with media planning and buying high-complexity nature of Digital programs makes it the most services assumed to be 1/3 of the total), Digital can typically labor-intensive medium in the advertising industry. require resources equating to an effective commission rate ranging from 25%–30% (with media planning and buying services assumed to be 1/2 of the total). 5 1 Executive Summary These issues require resources and drive a cost of providing basic Digital services that is directionally double that of traditional “full service” agency fees, when expressed per dollar of media spend. Because of the nature of Digital, it is becoming increasingly important to avoid thinking in silos and to plan and manage media, production and agency staffing/fee budgets (“investments”) together. In general, one should expect the relative increase in agency resources to be offset by relatively lower media spending as a result of better targeting, measurement and proven effectiveness increases. One should also understand the impact on lower external production costs (as former third-party labor requirements are absorbed within the agency). In combination, these further result in an increase in the so-called agency effective commission rate. These changes in cost structure cannot be regarded as “good” or “bad” in and of themselves. A change or shift in marketing expenditures is best evaluated by examining its effect on consumer marketing perceptions or buying behavior in short, by comparing how marketing results will be altered by the overall marketing program. Although this booklet provides a number of real client examples and benchmarks for comparison purposes, actual agency resources and fees need to be based on the specific requirements