Are ad agencies becoming bargain basements?

A large networked creative agency recently slashed its agency fee 60 percent to retain a large retail client. Now, why would an agency do that? Is it because the client is a big one? Or is it due to the fear of competition? It isn't the first to go down this path. In the past, agencies have turned into bargain basements to retain their nearest and dearest clients. It’s a classic case of ‘keep your money close but your clients closer.’

Remember the economic woes of 2008? Clients across agencies cut fees because times weren’t great. Well, the economy improved but the fees never came back, says Bobby Pawar, ex-chairman and CCO, Havas India. The same happened during the covid pandemic. Prices were slashed but once businesses were on their feet again post-pandemic, prices did not bounce back.

Why are agencies reducing fees then? Smaller agencies are willing to operate at comparatively smaller profit margins with lower overheads. Big agencies that have a reputation tend to ride on that renown. For the rest, it comes down to value. According to Pawar, value is unfortunately being defined by value for money and not value for the brand and the business. “You are pricing yourself in terms of the quantity of the output and not the quality of the output. That’s commoditised. You have taken quality out of the equation,” Pawar added.

More often than not, it’s the perception of a large client being associated with an agency that the latter strives to protect. Perception, in this case, becomes more important than money. Arun Iyer, founder and creative partner, Spring Marketing Capital, said that the agency business today is very challenging. “You are clutching at anything that you can hold on to,” he said.

Furthermore, the number of new and independent agencies that have started up in the last couple of years is significant. Even the number of senior and ‘not-so’ senior folks who’ve left big time agencies and started their own has gone up remarkably.

“Today, everybody is on par. The largest of players and the freshest of players, they are all on par. Everybody is promising the same thing, everybody says that they can deliver what the other can. So, there is no real differentiation,” said Iyer. As a result, you are spoilt for choice. It turns into a buyer’s market and the buyer (in this case, the client) is then in a sweet position to dictate pricing.

Are agencies afraid of competition?

Pawar cited three reasons for an agency slashing its prices. Firstly, there might be a competitor who can do the same job at the same or a lower price. Secondly, the fear could arise from a lack of confidence in their own value offering. Thirdly, it stems from the need to keep your job at the highest level.

Such scenarios intensively affect the already dynamic price market in advertising. Who is to be blamed? The client or the agency? Pawar believes that both parties should share equal blame. “Great work has always been based on great strategy. Somewhere along the line, strategy got de-emphasised,” he said.

Over the years, leadership in agencies has evolved from strategists to creative geniuses. As a result, the focus is on pushing out creative work rather than on strategic aspects such as brand building. This is a key factor that is responsible for the change in agency payment structures.

Unlike many industries, the advertising agency ecosystem does not stand together as one unit, where they take their peers' actions into account, says Iyer. “Making sure that we (agencies) are not undercutting each other, not stepping on each other’s feet… that doesn’t happen in the agency ecosystem,” he added.

Pitch for the long term

“There is this deluge of pitching that goes on. And, more often than not, the same brand calls for a pitch multiple times within a year. Multiple agencies show up at the doors of the client and they are ready to pitch all over again,” said Iyer. In such a scenario, charging a premium becomes challenging mainly because project to project culture has taken off in advertising.

Earlier, clients would enter into long-term contracts with agencies but that is rare today. Agencies as well as clients now seem to want to work on a project basis. Money keeps rolling in and everyone’s happy. But, how do you build a long-term relationship then? Execs and higher-ups always say that the goal is to build a long term relationship with a client but if the client itself remains uncertain and ends up calling for multiple pitches in a year, how do you forge that relationship? You are forced to think short-term. Therein lies the problem. Solution? Well, work talks, money walks.