IPA warns rising inflation makes higher agency fees ‘inevitable’
British advertising and marketing agencies will “inevitably” have to raise their fees to keep pace with rising inflation this year, the director general of the Institute of Practitioners in Advertising (IPA) has cautioned.
Agency fees will have to rise to keep pace with inflation, according to the IPA’s Paul Bainsford / Unsplash
Paul Bainsfair issued a stark warning that the fallout of Brexit, rising inflation and rising business costs make higher fees a fait accompli for most agencies in the UK.
In a statement issued overnight, he said: “No agency would take the decision to raise their fees lightly. But with inflation levels at their highest level in 40 years – rising by 9% in the 12 months to April 2022 and potentially hitting 10% in the last three months of this year – such decisions are, unfortunately, inevitable.”
Since the onset of the war in Ukraine, which has driven up costs directly and indirectly, earlier this year many agency business leaders within the sector have begun considering raising fees. Inflation in the UK rose to a 40-year high of 9% in May.
Higher inflation poses two primary threats to agencies – pressure to pay staff more, to keep pace with the cost of living, and the ensuing hit to consumer spending, which will likely dampen the enthusiasm of chief marketers and advertisers to spend with agencies. Many agency businesses have already begun to bear higher wage bills after a year of severe competition for top talent.
Bainsfair said: “Agencies are encountering a sector-wide skills shortage coupled with increases in recruitment fees; wage pressures with increased competition for talented people; individuals seeking higher salaries to offset the cost of living; raw material increases; and soaring energy and production bills. All of which are hitting agency costs hard. After years of responding to the procurement demands of clients there is little or no room to respond with cost reductions; therefore, fees will have to increase.
“This is something that clients – facing enormous pressures themselves and in the main having to ensure that selling prices are moving in response – may not welcome, but will certainly understand.”
The same pressures hitting agency business costs have also impacted advertisers, he noted, making the decision to raise fees doubly hard. However, Bainsfair cautioned that advertisers keep value, and not just the pounds and the pennies, in mind when negotiating new pricing structures with agencies.
“While agencies talk costs with their clients, it is of course vital for clients to keep the value that agencies deliver front of mind, and in doing so assuage a potential knee-jerk reaction of simply cutting spend. As the evidence shows, companies that continue to invest in advertising in the downturn fare best in the long term,“ he said.
”Agencies are not just creative machines but are also effective commercial powerhouses with expert understanding of consumers, including when and where is best to engage with them. Most crucially, they provide demonstrable evidence of the power and return on investment of their marketing communications activity in driving long-term brand growth for their clients.”