• by December 7, 2005

Chaos in science is about the apparent lack of order in systems that, upon examination of details, reveal patterns and inter-relationships. Advertising has always seemed a bit chaotic, but now with media proliferating, along with the mandates of corporate oversight, the alignment of procurement and marketing, and the drive to cut costs and maximize profit, it is crucial to act with common sense, manage risks, and seek harmony within the discord. This is about the interrelationship and ordering of agency compensation, media spending, brand sales and a company's value.

SOX is Sarbanes-Oxley, the law requiring due diligence and corporate governance to ensure that, among other things, suppliers and partners are paid fairly--agency compensation.

VOX is the "voice" of the advertiser to the public, the media. It is getting fair value for the media spend. It is about auditing the media placed by the agency, the result of which sometimes affects agency compensation.

SALES are of course self-evident, but more and more we are successfully linking sales and advertising. Surveys tell us that nearly half the time agencies are paid on some sort of performance incentive system, which often links advertising to sales.

STOCKS have to do with the value of a company. While "value" is dependent upon many factors, analysts generalize across industries by creating a ratio between a company's revenue and its market value.

If we take the interrelationship of these four elements and put them in an economic context, they look like this:

If a company is valued at $100 (Stocks)...

Sales can generally be characterized as half that, or $50. This is a pretty good average, even though there are considerable differences, sometimes much higher or lower, from company to company.

Marketers, on average, spend a bit over 5 percent of sales on advertising, so the media spend would be $2.50 (VOX).

Finally, for simplicity, 10% of advertising spend is for agency compensation--that is, 25 cents (SOX). Twenty cents goes to the creative agency, and roughly a nickel to the media agency.

So looked at from this perspective, these four elements are inter-related and in fact fit inside one another a bit like Russian dolls.

Managing the quarter or the media nickel (agency compensation) is critical. First, money saved here can actually be saved, unlike other areas where normally it is reinvested. This is also a visible area, since brand and media agencies are highly visible. This nickel plays a very large role in spending the media money ($2.50), driving sales ($50) and ultimately creating more value for the company by increasing both its monetary and brand equity ($100). So this is critical coinage (the hundred dollar nickel), even though there is seemingly little money at stake here relative to the other elements.

Media spending has never been scrutinized more closely than in the past five years. The emergence and resurgence of media auditing firms in response to client demand for diligence have rendered agency post-evaluation somewhat problematic. Independent assessments are increasingly preferred. Oftentimes, however, money is not really saved, but is reinvested in buying more media. Of course, $2.50 is considerably more than a nickel, which prompted one procurement officer to say, "the money I save here makes compensation savings look like chump change." This differential can be deceptive because it supports the corporate myth that getting the media spending right is far more important than fine-tuning and incentivizing fair compensation for the experts who are planning and buying.

Sales are really about making, not saving, money. They are driven, among other things, by advertising copy and strategies. Modern testing, optimizing and modeling have improved the linkage between advertising, sales and return on marketing investment. This is now a favorite subject (and rightfully) at ANA, ARF and 4As conferences.

Finally, the value of a company is related to sales and revenue and its brands' equity, much of which is fueled by advertising.

The point is that marketers need to fine-tune agency compensation to get the most out of their investment and the client/agency relationship, to assess their media plans and buys to effectively reach more customers, and to perfect their strategies to help drive sales and increase the value of their company.