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The secret to a profitable agency

The secret to a profitable agency Ed Lu

Marketers and their procurement departments continue to batter and bully their ad agencies over pricing. The surplus of readily eager agencies and an industry trend towards constant price scrutiny has led clients to dictate pricing to their agency partners.

However, price is reflective of the quality of a product or service. More expensive items typically have higher quality and more features. Less expensive is the opposite. Great creative agencies are innovative, unconventional, and offer unique alternatives to the mainstream. When an agency possesses these qualities, cost will be commensurate and marketers should be prepared to pay the going rate.

Consider someone who decides to buy a Mercedes. That person has committed to spending more in return for engineering excellence. Consider one's doctor. Does anyone really want their doctor's practice to be barely scraping by financially? Consider one's attorney. Would anyone feel good about their attorney working out of the trunk of their car? No. You want the successful brands, products, and vendors. You pay because you want the quality, and the same should be true of your agency. Great brands have great agencies. Those agencies have great team members. That expertise costs more. It's a simple equation we follow in our personal lives but is frequently lost in business.

During negotiations between marketer and agency, the conversation will eventually gravitate towards price, and it's usually the marketer's ambition to pay as little as they can. This behavior is expected and understandable. However, sometimes the price is so low that the agency will incur a loss. That price may cost the marketer a chance to partner with a truly innovative agency and undo the creativity it seeks to acquire. A team can't hit home runs if they don't pay for homerun hitters. If it becomes an exercise of finding the low-cost vendor, how good will the agency be?

Consider Chipotle, the sustainable fast food juggernaut, who recently reported quarterly results that showed a lower profit than expected despite surpassing sale expectations. The reason was that food costs were increasing and Chipotle had not passed those additional costs to the consumer. Chipotle's plan: increase the cost of every burrito bowl by approximately 50 cents. Chipotle was confident that their customers were loyal and found enough value to easily swallow the price increase to obtain high-quality prepared food. The result was the following quarter's results showed the highest record quarter to date on both sales and profit. Chipotle's customers recognized the value of their food and were more than willing to pay for it.

Long gone are the days of non-defendable agency commission and profits. Marketers should be willing to pay a fair price for what it means long term. If the agency does the work for a fair price, they will thrive. As a result, the client's work will thrive too. The agency won't have to cut corners and find a way to eke a profit. The more pressure a marketer puts on the agency, the more likely that agency cannot continue to run that particular business or account like it needs to be run. Shrunk margins could mean an agency has to remove a resource on client work, and that isn't going to help the marketer's brand move forward. An agency, like any business, has to derive profit or it won't be able to sustain itself. That kind of maneuver doesn't help push the marketer's brand into the next universe. In fact, that brand's growth may just have been stunted. 

To be an effective partner who can think about their client's brand, positioning, and strategic path, an agency or service provider has to be compensated fairly and appropriately. If this is not the case, the agency will have to tightly manage the time spent and administration of the account, rather than focusing on the nuances and brilliance of the deliverables. The relationship between marketer and agency has to be respectful and copasetic, otherwise one or both will always feel disadvantaged. Marketers need not be overcharged, but as long as the rate is fair and the agency is compensated adequately, both sides can simply focus on pumping out truly immersive experiences that resonate with the marketer's targeted audience.

Ed Lu is finance director at Questus.

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Ed Lu is the VP of Finance at Questus, a revolutionary advertising agency with offices in New York City and San Francisco. You can contact Ed at [email protected]  Questus is leading the advertising revolution. Technology and connectivity...

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