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October
92011
3P TRACK
2
“Advertisers and their agencies are facing an increasing challenge, which…often creates friction, inefficiency and waste in client/agency 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.”
Client Perspective
May not understand requirements to deliver digital marketing programs
Simplify and standardize processes for managing agencies:
Same compensation framework
Same metrics (effective commission rate, blended hourly rate, etc).
3
Digital Reality
More labor-intensive
Different set of skills
Demand > Supply for certain talent
Historical relationship between cost of “creative” “production” and “media” no longer relevant
4
Digital Reality
The right agency model to deliver value
Getting compensated
Maximizing profitability
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Agency Model
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Digital Agency Service Model
Brand Strategy
Creative ProductionMedia
Strategy and Planning
Media Buying
Multiple Channels:Website, SEM, SEO, Video, Social, Email, Mobile, etc.
Build/Partner/Outsource?
Specialist/Integrated?
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Digital Agency Service Model
“One of the smartest things we did was build an in-house production capability.
Having said that, I don’t know if we would do it today.”
President, Leading Digital Agency
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Brand Strategy
Creative ProductionMedia
Strategy and Planning
Media Buying
CommoditizationInvestment required given expanding range of options
Digital Agency Service Model
Production
Quality ControlUnderstand Client’s Technical Infrastructure
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Brand Strategy
CreativeMedia
Strategy and Planning
Media Buying
Digital Agency Service Model
Brand Strategy
ProductionMedia
Strategy and Planning
10
Media BuyingCreative
Digital Agency Service Model
Production
Operating MarginsIn-house: 19.2%Outsource: 16.5%
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Brand Strategy
CreativeMedia
Strategy and Planning
Media Buying
Digital Agency Service Model
Media Buying
Operating MarginsIn-house: 18.5%Outsource: 18.0%
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Brand Strategy
Creative ProductionMedia
Strategy and Planning
“Hearst Buys iCrossing For $325 Million”
“The Newest Ad Agencies: Major Media Companies. Marketers Increasingly Bypass Traditional Business Model”
“Google, Omnicom Partnership
Redefines Digital Advertising”
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Clients
Strategy and
CreativeProduction
Media
Planning
and Buying
Ad Exchanges
Media
Companies
Search Engines
"If I were an agency, I would be really worried
about being disintermediated. More and more, agencies are
almost in the way sometimes.“
Becky Saeger, CMO Charles Schwab
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Ad Networks
Clients
Strategy and
CreativeProduction
Media
Planning
and Buying
Ad Exchanges
Media
Companies
Search Engines
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Ad Networks
So, What’s the Right Agency Model?
Client RequirementsMedia ConsolidationProduction Volume
Agency Core CompetenciesCulture
Ability to DifferentiateQualityPrice
$$$Growth vs. Margin
Erosion
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Compensation
17
of Marketers utilize
retainer/project fee
combination
Increasing use of performance
incentives
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Compensation
Educate/Define SOW
Budget
Presentation
Utilize Performance Metrics to
Demonstrate Value
19
Output-Based SOW
Traditional
Create development and production of one :30 TV SpotOne full-page, four-color print ad
Digital
Website Enhancements: Strategy, Architecture, Wireframes20 Landing Page Designs & Code Executions
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Scope of Work
Phase Detail
Program Objectives Drive trial of new
product through qualified traffic from key words
to landing pages.
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
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Scope of Work
Phase Detail
Program Objectives CPC/PPCImpressionsCTRQuality ScoreCampaignAd GroupConversion
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
23
Scope of Work
Phase Detail
Program Objectives Develop 4 Landing PagesDevelop Messaging and Online AdsDetermine Search TermsAllocate Media BudgetOptimize
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
Develop 4 Landing Pages
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Scope of Work
Phase Detail
Program Objectives
Develop 4 Landing Pages:
Discovery…Design…Development…Deployment…
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
25
Scope of Work
Phase Detail
Program ObjectivesDevelop 4 Landing
Pages:Project ManagementDigital PlanningCopywriterUX DesignDevelopment
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
26
Scope of Work
Phase Detail
Program Objectives
Define Key Terms
Project Detail
Agency Resources
Time Line
Budget Proposal
27
Budget/Proposal
TV Campaign
Agency Fee $150,000
Production $100,000
Media $1,000,000
Total Budget $1,350,000
Agency Fee % of Media
15%
“Marketer perceptions are that digital agencies are more expensive,
when in fact, the expense is simply related to outdated perceptions about agency fees as a percent of media and/or production spend.”
David Beals
Digital Campaign$250,000
$0
$1,000,000
$1,250,000
25%
Category Budget
Creative/Production $250,000
Media $1,000,000
Total Budget $1,250,000
Budget/Proposal
Metrics Targeted Actual
Impressions XX XX
Clicks XX XX
CPC XX XX
CTR XX XX
CPM XX XX
Conversions, etc.
XX XX
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Managing Profitability
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Attendee Survey
% of Revenue
Revenue (Gross Profit)
Personnel Expense 57.1%
General & Admin Expense 24.3%
Operating Profit 18.6%
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Profitability Model
% of Revenue
Revenue (Gross Profit)
Personnel Expense 57.1%
General & Admin Expense 24.3%
Operating Profit 18.6%Employee utilization >
80%
Profitability by client/service
Adjust for owner’s distribution
Client / Agency Labor Mix70% / 30%
Full-time / Freelance Staff:Recurring / Project Revenue
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Profitability Model
% of Revenue
Revenue (Gross Profit)
Personnel Expense 57.1%
General & Admin Expense
24.3%
Operating Profit 18.6%
Rent: 8% RevenueRSF Per Employee $175
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Agency Example
As Reported Adjusted
Revenue (Gross Profit)
Personnel Expense 59.0% 65.0%
General & Admin Expense
28.0% 28.0%
Operating Profit 13.0% 7.0%
Client/Agency Labor Mix: 54%/46%
Billing rates do not cover overhead
Subpar profitability on key digital services
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Agency Example
Website Development
OriginalRenegotiate Dev.
Fees
Copy In-
HouseRevised
Monthly Reportin
g
Minimum
Profitability
Agency Fee less external costs
7,500(4,000) 1,000 1,200
7,500(1,800)
3,900(1,140)
11,400(2,940)
Agency Gross Profit
3,500 1,000 1,200 5,700 2,760 8,460
Internal Costs (5,238) (1,080) (6,318) (2,052) (8,370)
Operating Profit
(1,738) 1,000 120 (618) 708 90
Operating Margin
-50% -11% 26% 1%
34
35
Educate/Define SOW
Budget
Presentation
Utilize Performance Metrics to
Demonstrate Value
% of Revenue
Revenue (Gross Profit)
Personnel Expense 57.1%
General & Admin Expense 24.3%
Operating Profit 18.6%