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More about the Structure of the Advertising Industry (continued)
This is the term generally understood to denote anything other than advertising in the major media, and is often described as below-the-line marketing. It comes in many different forms, each of which demands a more specialised, often more technically complex, set of skills. These include direct marketing, sales promotion, interactive marketing, public relations, healthcare marketing, and so on.
In simple terms, direct marketing involves any form of advertising which communicates with its target audience one-to-one, for example through individually targeted direct mail. It often asks for a response from the target, for example, in the form of a coupon or a phone call (in which case it is sometimes called "direct response"). Increasingly, direct marketing and digital marketing via the internet have become aligned since both involve a one-to-one relationship with an end user.
Depending on the type of interaction, this is also sometimes described as "customer relationship management" (or CRM), for example in the case of customer loyalty schemes, or financial services membership. In many cases, old-style direct mail agencies and new-style interactive agencies have merged to offer a combined service. Social media (Facebook, Twitter, search marketing etc) transcends its roots in CRM and so it is also widely offered by PR agencies who for the most part don't otherwise provide traditional direct & digital marketing services.
Sales promotion covers a variety of different areas, such as in-store promotions, exhibitions or one-off sponsored events. In very broad terms it relates to the interaction between the client brand and its customer in a specific place (for example, in a store) or at a specific event (for example, a sports match or a concert). However different agencies use different terms to describe the process. Those involved in the retail environment often use the term "brand activation"; while agencies which specialise in live events sometimes call it "experiential marketing".
Traditionally, all of these marketing services disciplines have been largely execution-based - in other words, a large client would employ an advertising agency to come up with its main advertising concept, and would then hire the appropriate marketing services agency to adapt that concept in other forms. However the lines between these different disciplines have become blurred, especially with the emergence of the internet as a major advertising medium.
As a result, a breed of larger marketing services agency has emerged. This resembles the traditional advertising agency in many ways, such as global scale and creativity, but tends to specialise in a more direct form of marketing which engages the target audience not as part of a mass market (as with television advertising) but on a more individual level, often through direct contact, now primarily via digital channels, but also by mail, in a store at point of purchase, or at a sponsored event. Examples include Wunderman, Rapp and others. Sometimes, these agencies also offer all the above-the-line skills of the traditional advertising agency as well, in which case, they are often known as integrated agencies, or sometimes through-the-line agencies. (See here for major marketing services agencies).
However, just as common is a less creatively oriented form of agency whose main speciality is more workmanlike customer relationship management (or CRM) in areas such as list and lead management, telesales, data analysis and number crunching. These agencies, such as Epsilon, Acxiom or Experian, have begun to establish a considerable hold on the industry as a result of the sheer quantity of customer information they control.
Increasingly also, management consultancies are carving out a large share of marketing budgets, especially in digital marketing. Accenture, PwC, Deloitte and others are all now major players in the modern marketing environment, advising clients on the processes necessary for adapting to a digital-led world and then executing them. They don't usually initiate creative concepts, but they have a major presence in the construction of relationship management and back office systems. Accenture, in particular, is increasingly moving into the domain of traditional groups by acquiring creative advertising agencies to offer a fully integrated service.
How do agencies get paid?
The original model used across the entire industry was commission-based, whereby agencies would mark up the cost of media or third-party services purchased on behalf of the client, traditionally by 15%. That commission would cover all the agency's inhouse costs from research to creative concepts to media. Often, the arrangement would also be sweetened with a retainer fee. From the 1960s onwards, that percentage gradually began to become negotiable as agencies vied to poach business from one another at lower rates.
The unbundling process that took place during the 1980s effectively put an end to commission-based remuneration for anyone other than media agencies. Many of these still charge a percentage-based mark-up on media purchased, but now usually on a sliding scale, with higher spends rewarded with commission rates that are substantially lower than that century-old 15% benchmark. With global media budgets in excess of $1bn, even 1% is a sizeable payout, especially if accompanied by a retainer fee.
However virtually all other agencies, and an increasing number of media agencies as well, are now remunerated in the form of negotiated fees. The most common type is the labour-based arrangement, in which agency and client agree a business plan or "scope of work" (SOW) upfront. The agency calculates how many staff will be needed to execute that plan, often expressed as the number of full-time equivalent employees, or "FTE"s, who will work on the account. A fee is agreed on that basis, ideally with an additional allowance on top for profit.
Yet here too, the urge on the part of clients to shave costs has introduced alternative fee structures. In some cases, agency's actual base costs will be covered but any profit must be earned separately, usually through some sort of agreed performance incentive, such as product sales achieved or market share. In other cases, particularly for project work, the client will simply state what it wants to achieve and what it is prepared to spend to that end, and the agency must make its own decision whether to take it or leave it. These are sometimes described as "output-based" fees (for example to deliver x number of 60-second commercials) or "value-based" fees (for example, to launch a new product for a cost determined by the client).
Payment models are monitored by the annual Trends in Agency Compensation report compiled by the Association of National Advertisers. According to the 2017 edition, a little more than one in ten agencies use the commission model as their preferred form of remuneration (though that is an increase on the number cited in 2010, when only around 3% of agencies used it). Of the rest, around 60% have some form of negotiated fee-based arrangement, based on pre-agreed staffing or scope of work. Around another 25% operate a fixed fee remuneration scale. Many larger agencies prefer to negotiate a combination of negotiated fees with an additional bonus payable according to business results, for example increases in sales or market share. In practice, however, only comparatively few advertisers are prepared to accept such an arrangement.
Last full revision 22nd December 2017
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