Agencies Agency Models Ad Spend

‘We won’t cheapen what we do’: ad agencies raise fees as clients cost crunch


By Sam Bradley | Senior Reporter

August 17, 2022 | 9 min read

Agencies across the advertising industry are having to increase their client fees. But while it might be necessary to cope with higher running costs, any rise carries risk. Here’s how to mitigate it.


Business costs have been rising for agencies across the industry / Adobe Stock

Inflation and interest rates are rising, client enthusiasm is on the wane and business costs are ramping up. In response, many agencies have begun to put up their rates. But when clients are also looking at squeezed bottom lines, that conversation might be a difficult one.

The IPA’s Paul Bainsfair warned in June that higher prices in the sector were “inevitable,” even if they “may not be welcome” for clients. So, how should agencies go about raising their prices?

Inevitable rise

There’s a “perfect storm” of economic conditions facing agencies at the moment, says Gill Huber of Oystercatchers. High inflation is hitting consumer spending, concerning CPG brands and retailers, as well as increasing pressures around the cost of living for agency workers. The ongoing competition for talent has seen wages themselves rise – not equally across the board, but enough to impact the bottom lines of major holding companies this quarter.

Other costs such as energy, transport and direct production costs for creative and production agencies are also up – in part due to the war in Ukraine. Higher outgoings mean agency margins are decreasing; S4’s high wage bill, for example, was one factor behind the profit warning it recently released.

“All those factors are coming together at once” to provoke an outbreak of caution among marketers as well as agency leaders, Huber adds. Advertisers hit by any of those issues are likely to be spending less.

There’s a mass of data suggesting brands that increase marketing investment during a recession receive impressive returns. Analytic Partners’ latest ROI Genome report suggested that brands that increased marketing investment during the 2008 Great Recession saw improvements in their return on investment, and brands that increased media investments in the same period saw a 17% rise in sales. But the IPA’s latest ad spend predictions suggest those lessons may not be having much of an impact on those holding the purse strings today.

And clients not cutting their overall spend are putting their media investments in more cautious areas. “The mix of budgets may change,” Huber says. They’re also keeping a close eye on rivals as they plan for less lucrative quarters. “Clients are coming to us to ask what’s going on in the market – what are other CMOs doing? What are they planning? They’re trying to get ahead of what’s coming next.”

Accenture Song’s Pritesh Gadhia tells The Drum he expects to see a bigger focus on cost from clients in the coming months and years. “We’ll see organizations thinking more about how they can get stronger at the basic stuff, be it customer service, how you transact on a commerce website or the supply chain [or] how they use data and analytics,” he says.

After two years of client openness to marketing experimentation and risk, he predicts brands will be “more considered around how they drive innovation. It’s been a moment to do new things, products and services ... we’ll see that balance out [as clients] think about longevity.”

With less new business on the table and more costs to deal with, the decision to put costs up is a straightforward one for agencies. Lucinda Peniston-Baines of Observatory International tells The Drum that “this whole talent crunch has meant that agencies have got to put some fees up,” especially for services that require in-demand staff, such as digital specialisms, “where there’s such incredible competition for talent.”

“You’ve got to recognize that there may be certain skill sets you want to buy and right now they are going to be more expensive than you’re used to.”

Tricky conversation

Paul Grogan, founder and creative director of Think Design Manchester, says his agency can’t hold its prices at their current position. “We won’t do it; it’s just not worth it. We’re not going to cheapen or devalue what we do,” he says.

It’s not always been an easy conversation with clients, and any rise leaves Think open to the risk of being undercut. “We’re trying to increase our day rates [but] there’s a bit of a race to the bottom,” he explains. “That is a reflection of the fact that businesses are struggling and businesses are trying to do everything they were doing three years ago, but for half the cost.”

B2B specialist agency SeeBlue has also increased its client fees “broadly in line with inflation,” says Helen Brown, managing partner. “We’re not doing anything that is out of sync with the economy – we’re doing what we need to do to maintain the brilliant experience we have with clients.”

That’s in line with the advice of Peniston-Baines, who says agencies need to err on the side of caution with fee rises. “It’s got to be done,” but “it’s got to be respectful and reflective of what’s actually happening in the marketplace,” she says.

Luckily for the agency, Brown says “we haven’t had a single objection” from clients. The agency has navigated what could have been a tricky moment by being “completely open and transparent” with clients.

During the pandemic, the agency invested in proprietary tech products, which “we believe give us an edge over our competitors in the account-based marketing space,” Brown says. Emphasizing the new additions to its service offering has also helped soften the blow of higher fees.

“Any agency that’s selling itself purely on price ... that’s not the space we play in. Yes, we want to be competitive, and we have a particularly lean model. But we’re not winning based on price – we’re winning based on innovation, ideas, quality of service. I think most quality agencies will want to be known for that, not just on being the cheapest.”

Procurement power

Marketing procurement experts have taken on a more involved role in reviews and new business processes with large brands in recent years, both taking part in more of the managed review process and in leading it outright. Tracey Barber, global chief marketing officer of Havas Creative, says she’s seen a 25% increase in pitch opportunities coming directly from procurement teams, rather than coming through intermediaries or consultants. “There has been a shift change from intermediaries or consultants managing a pitch process to procurement,” she says.

The current economic situation is likely to increase that trend, says Peniston-Baines. “We do a lot of work with procurement people within the client organizations we work with, and they’re not having it,” she says. “The good procurement people recognize there has to be some give and take, and the ones who are less good can be a bit intransigent on this and dig in their heels – ‘computer says no’ – which never leads to a good outcome for their agencies or their own marketers.”

Brown suggests procurement teams aren’t to be feared, though. Their closeness to the financial realities of running a business means those conversations may even be easier, she says. “Procurement departments in larger businesses know why this is happening, and that this is the reality of the economy and the situation we’re in. It’s not surprising to anybody.”

A survey of 150 procurement and marketing professionals published by Havas in June this year found 50% of procurement leaders said there was a ‘disconnect’ between agency and advertiser; one in five said they believed their agency partners only had the ability to present ‘new and shiny’ ideas rather than actual solutions. The report included a number of suggestions for agencies that wanted to improve their approach to procurement teams and amend their client relationships.

“We are developing a program in every single one of our agencies across the world over the next six months, partnering with clients and with procurement leads in our existing client relationships, and looking at how we evolve the way we build and manage our client-agency relationships.”

Barber says that initiative aims to improve Havas’s ability to bring onboard new clients – but it’s also helped it navigate a worsening economy. Dealing more directly with brand procurement teams can set the scene for conversations about the long-term future of an advertiser, she says.

“It’s about where you add value and being clear about your shared ambitions. If you understand what the client wants to achieve in a year’s time, in two years’ time, you can have a much more open and transparent conversation about remuneration, value, how you shape teams and what they’re looking for.

“As an industry, we need to be better at having those honest conversations. It can be about how we deliver what you need as a client, but it also allows us to run our business more effectively.”

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