The 2% Solution: Enough to Kill Growth?
I never doubted that the days of 25-40% commissions were not going to last forever even in the heyday. When those kinds of rates were charged in the “early days” the learning curve was steep and budgets were small. All the same, the companies that paid these rates often saw significant results. Companies like IBM were reported to be at the high end on fees, yet they got results that seemingly paid out as their Interactive efforts continued to grow and are now a major element in their mix. Among other companies that could not bear to pay such high commissions to agencies, there were failures. Were these a result of a lower quality agency service due to funding? Hard to tell but the question is there.
Now, at a time when many Interactive fee arrangements are more in the 8-15% range, we have a situation where major companies like Ford, P&G, Chrysler and Kraft are said to be paying in the 1-3% range for larger Interactive media agency fee deals. This is the range of network TV and other media AOR arrangements. Which would be fine if a) the volume were equivalent and b) the workload was commensurate with the compensation and roughly equal to the other media. Those media and management folks talking off the record said that the companies involved either do not know or do not care about the additional work in Interactive such as back end optimization. It takes away the agency incentive to invest in the future through pursuing new technologies. And, in fact, may result in a larger allocation to TV and magazines, which under this scenario have higher margins for the agencies.
When talking with management at the top ten media agencies, most of them have little interest in pursuing Interactive media aggressively or investing in it given the low level of client appreciation for the medium. It also means that third party services such as ad serving could actually collect more money on a campaign than the media agency. Yet another reason for the serving companies to adopt % of billing rather than CPM modeled pricing. When a vendor makes more than the company that hires it, thinks are way out of whack.
But whose fault is this? The client or the agency? After all, it takes two to make a deal. And, will these prove to be good deals that work for all parties, or what my financial advisor calls “the original bad deal.” In the ideal world, we would all like to see fair compensation for good work that has a chance to grow the business. Let’s hope that this drive to a 2% (or less) solution does not become the equivalent of CPA deals from the site side, taking all incentive out of the deal. Because, last time I looked, this business was still in a learning mode, where all stakeholders, clients, agencies, sites and technology vendors had much to gain through investment in the future.
I fear that the companies who attempt to eke too much efficiency out of the system may pay with less learning and poorer results in the long term.
David L. Smith is President and CEO of Mediasmith, Inc.