• by David L. Smith , December 2, 2002

Many software and hardware companies today sell based on TCO or Total Cost of Ownership. This tactic is especially effective when comparing to either a market leader or a company that is cutting prices and appears to be cheaper. The concept of TCO has to do with the end cost of the deal when all is said and done, including upgrades, service fees, etc. As a consumer, you have probably run into this concept if you have tried to evaluate leasing vs. buying a car.

We run into pricing situations all the time in new business and with evaluations by current clients. Most times it comes down to the percentage of gross billings that we will charge, which is often compared to that of competitors. As an example, I wrote last week about the commoditization of pricing that is quickly happening in the Interactive media agency space.

I believe that clients ought to be evaluating their media services (and other agency services) based on a concept I will call TCS or total cost of service.

There are several categories that should be included in this computation. The first is, of course, the current basis, which is the fee that is being charged by the agency. Added (or deducted) from this should be a number of factors including savings, value added and monies left on the table or lost through error. I’d like to explore these concepts in depth.

Documenting savings is said by some to be hard to put a number on. Yet there are deals all over our industry that are incentive based vs. savings, so some have figured out to do this in a win-win manner. A couple of examples: 1) Savings vs. the previous vendor on the same or equivalent inventory. The establishment of a base line is all-important here. We have done this a number of times to the satisfaction of both the client and agency. 2) Savings vs. established earned rate card levels or industry norms. With a resource like SQAD, this should be especially easy to do in radio, TV and cable. In time, SQAD will have grown their databases in print and Interactive so that these media can be included in such a valuation as well. The important thing here is to agree on the basis for comparison. For example, I have had clients who believed the pitches of “savings” promised for print when the basis was the 1x, not the earned rate that they should have gotten anyway.

The second factor is value added. This includes easy-to-document areas like make goods and free insertions/spots/impressions from the media as well as putting a value on merchandising and promotions provided by the media. In addition to this, a harder but important area to document is value added services provided by the agency. This can be in the form of strategic services from senior people above and beyond what a competitive baseline might be, and projects taken on that others agencies might bill out but are included in the base fee.

The last area is not something that agencies will be anxious to provide to their clients but is available all the same through auditing services. Media auditing is an article unto itself, but suffice to say that these services that are fairly standard in Europe have yet to take hold on a global basis in the U.S. From a client perspective, these services can document areas where goals have been underdelivered from an advertising weight level basis, can identify mistrafficked activity on the part of the media and situations where either the media vendor or the agency owe credits to the client. In the final computation, these factors also need to be taken into account.

A recent release from P&G indicated that their purchasing department would be taking a greater involvement relative to ongoing agency relationships in the future. This means that agencies need to find ways to quantify the true value of their services if they don’t want to get into an all-out price war. TCS is a step towards such a valuation.