Arithmetic is Not an Opinion

There are so many criteria that go into selecting a new agency: size, geography, product conflict, culture, track record, reputation, credentials, personality, quality of staff, creativity, strategic and negotiating ability, cost and the ability to sell product. Let’s simplify the ultimate criteria when it comes to selecting a media agency. The average brand spends 2 ½% of sales on media advertising. Roughly 5% of that goes to media agency compensation. So, if a brand sells $100 in product, $2.50 goes to media and a bit less than a dime to the agency.

If the agency just focuses on submitting the lowest bid and/or protecting the tactical media spend at the lowest possible media cost they are missing the point. That saves pennies off of the dime and $2.50.

If the agency focuses on strategy and increasing sales that earns dollars. That increases the $100. That’s the group you want to hire.
Look at the math…

Save 10% on agency compensation (10 cents) = save a penny
Save 10% in media costs ($2.50) = save 25 cents
Total saved = 26 cents
Earn 10% more in sales = $10
Ten dollars vs. twenty-six cents

That’s almost a 40:1 ratio in favor of focusing on increasing sales. Put another way, 97% of the money at stake is related to growing the business, not increasing efficiencies.

Of course you want your agency to focus on both and every media agency will negotiate fee and demonstrate ways they beat marketplace averages on media costs. However, not all focus on how they evolve the “BIG IDEA” that creates more sales. As with any kind of agency, look at their ideas. That’s the reason you hire them in the first place. They are supposed to be the engine that drives business.

Recently, we had a search pitting two finalists against one another. One focused on the margins they could save in fees and media costs. They were $500,000 less expensive than their competition and promised to save at least 10% on the $40 million spend. That’s a considerable amount of money: $4,500,000 to be exact. However the other agency focused on growing the business and showed how they could grow a multi-billion dollar brand in the first two to three years. They won the business.

When conducting an agency review, look for efficiencies, yes, but really concentrate on how they will help you grow business. Arithmetic is not an opinion.

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