Marketing midterm

Chapter 5

The Advertising Agency, Media Services, and Other Services

Chapter Objectives

After reading this chapter you will understand:

1. The agency.

2. The history of the agency business.

3. The full-service agency.

4. Global advertising agencies.

5. Agency and client relationships.

6. Forms of agency compensation.

7. Other advertising services.

Chapter Overview

Agencies are pressured today to lead the way in communication through all the new channels and to react in the marketer’s interest in figuring out how to deal with the new control that consumers have, especially the Connected Generation. Despite the pressures, advertising agencies continue to be the most significant companies in the development of advertising and marketing in the U.S. and globally. It is no longer business as usual. Corporate organizational changes have caused agencies to reengineer themselves to become stronger partners in helping to reach the advertisers' marketing and sales goals. Agencies have changed their structures and gobbled up specialty firms involved in integrated communication. It’s not business as usual.

Lecture Outline

1. The Agency

A. An advertising agency is defined (AAAA definition) as being an independent

business, composed of creative and business people, who develop, prepare, and

place advertising in advertising media for sellers seeking to find customers for their

goods and services.

B. Agency facts.

1) According to the U.S. Census Bureau, there are more than 10,000 agencies in

operation in this country.

2) Other estimates vary as to how many agencies there are.

3) Unfortunately, there isn’t a single printed or online directory that lists every

agency throughout the country.

C. The majority of agencies are small one- to ten-person shops. Many claim to be

“experts” at something.

2. How Agencies Developed

A. The Early Age (Colonial Times to 1917).

1) The first ad agencies were really colonial postmasters, with advertisers leaving

their ads with the local post office to be run in Colonial papers.

2) Space salesman Volney B. Palmer is the first person known to have worked on

a commission basis.

a. In the 1840s, he solicited ads for newspapers that had difficulty getting

out-of-town advertising.

b. He received a commission for finding them business (sometimes as much

as 50 percent).

3) Space wholesalers.

a. As early as the 1850s, people such as George P. Rowell bought large blocks

of space for cash from publishers at very low rates, less agents’ commissions and then sold "small squares" space at his own retail rate.

1. These wholesalers sold by “lists” that they had acquired. (This was the original media package deal.)

4) The first rate directory appeared in 1869 from Rowell.

a. This publication was controversial because many thought that it gave away

trade secrets.

b. This was the beginning of the media estimate.

5) The ad agency became a creative center in the early 1870s.

a. Creative pioneers were Charles A. Bates, Earnest Elmo Calkins, and

Ralph Holden.

b. These men not only wrote ads they also brought together planning, copy,

and art to make advertising effective.

1. The ad agency was no longer just a sales organization. It was a creative

center for advertising planning ideas that included artwork, copy, plate making, and ad placement in publications.

6) Agency-client relationships were established in 1875 when Francis Ayer

established the N.W. Ayer & Son agency.

a. Ayer proposed to bill advertisers for what he actually paid the publishers

and then added a fixed charge.

1. In return, the advertisers would agree to place all of their advertising

through him.

c. Relationships made this system work.

7) The Curtis No-Rebating Rule came in 1891 when the Curtis Publishing

Company announced that it would pay commissions to agencies only if they

agreed to collect the full price from advertisers.

a. This was the forerunner to no-rebating agreements.

b. Commissions ranged from 10 to 25 percent.

8) Standard commissions for recognized agencies were established in 1917.

a. Newspaper publishers agreed upon 15 percent as the standard agency

commission.

b. To get the rate, the agency must be “recognized” and to get this distinction

the agency must:

1. Must charge full rate and have no rebating.

2. Have business to place.

3. Show competence in handling business.

4. Must be financially sound.

1. Today, agencies still receive commissions from the media for space they

buy for clients. Artwork and the cost of reproduction are generally billed by the agency to the advertiser. There is a service charge on these transactions.

9) The American Association of Advertising Agencies (AAAA) (est. in 1917) is

a great force in improving the standards of the agency business and advertising

practice. Its membership produces 75% of total nationwide ad volume placed

by agencies.

B. The No-Rebate Age (1918-1956).

1) Radio. Significant events included:

1. 1925 Scopes trial (teaching evolution arguments) broadcast and dramatized

on radio.

b. Great Depression and World War II made radio into a national medium.

c. By 1942, agencies were billing more for radio ($188 million) than for

newspapers ($144 million).

d. Radio boom lasted until the advent of television.

2) Television. Significant events included:

a. National broadcasts occurred after 1952.

b. Became a preferred medium for agencies during the 50s.

1. Television billings went from $171 million in 1950 to $1,225 million in

1956.

3) Electronic Data Processing. Significant events included:

a. The computer entered advertising through the accounting department.

1. The computer aided agency by fostering growth in syndicated research services.

4) 1950 – 1956 beginning of advertising’s biggest boom. Overall advertising expenditures reached $9.9 billion by 1956 and more than 60 percent of this spending was national advertising placed by advertising agencies.

C. The Age of Negotiation (1956-1990)

1) U.S. Department of Justice Consent Decrees.

1. Stopped no-rebating provisions between media and agencies, as a restraint of trade.

b. Did not affect the 15 percent commission.

1. Opened the door for review of total media compensation an agency receives

for its services.

D. The Reengineering Age (1990-2000).

1) During the 80s corporate mergers caused agencies to follow suit to

be more competitive and to serve larger clients.

1. In the 1990s moved toward integrated services and began to reevaluate how they operated.

E. Media and the Digital Age (since 2000).

1. Agency holding companies created mega-media buying and planning agencies that became profit centers to attract global clients and become more efficient and cost-effective.

1. Interactive agencies have risen in importance.

3. The Full-Service Agency

A. Introduction.

1) In the simplest terms, the full-service agency offers clients all the services

necessary to handle the total advertising function--planning, creation,

production, placement, and evaluation.

2) Many expanded this to include the management of all integrated marketing

communications.

3) The next generation of advertising requires a new concept of the role and

responsibilities of an advertising agency.

a. This may require a new organization and restructuring.

b. Operations will change to a better managed process.

4) There is no universal model for organization because agencies have clients with specific needs.

5) The process of assigning a new account in an agency will generally follow the

steps outlined below.

B. Diagnosing the marketing and brand strategy.

1) When a new account is assigned, the full-service agency begins by collecting

all that is known about the product category, the brand, and the competitors.

1. Research or brand planning takes the lead and asks these questions to define the brand's core.

1. Who are the prime prospects?

1. Where are they?

1. What are the demographic and psychographic characteristics?

1. How does the product fit into their lifestyles?

1. How do they regard this type of product, this particular brand, and competitive products?

1. What benefits are sought from the product/brand?

1. In what distinctive way can the product solve prime prospects' problems?

1. What media is best to reach the market?

1. What will it take to reach this audience?

( *****NOTES: Use Exhibit 5.3 Here***** )

C. Setting objectives and developing strategy.

1) After questions are answered from research, a strategy is formulated that

positions the product in relation to the prime-prospect customer and emphasizes

the attribute that will appeal to the prime prospect.

2) Account management leads this phase.

3) Examples of what might be accomplished strategically could include:

a. Intensifying brand imagery.

b. Recapturing prior users.

c. How to carry out strategy.

D. Creating the communication.

1. Decide on a disciplined creative strategy, write copy, and prepare rough layouts and storyboards.

1. Media Plan.

1. If media function is separate, both creative and media agencies have to collaborate to develop the media plan.

1. Define media strategy, ensuring media objectives parallel marketing objectives

1. Select your media, exploring both traditional and nontraditional options.

1. Media schedules with costs are prepared, coordinating all elements of communications mix.

1. Media will multiply the impact of a creative team; an agency or independent media agency/buying service doing this.

3) The Total Plan.

a. Present roughs of the copy, layouts, and production costs.

b. Present media schedules and all costs

c. Conclude by examining total costs.

4) Evaluation Plan.

1. This is the end and the beginning.

1. A moment of reckoning, based upon objectives set in the beginning.

c. The Plan is an accountable system.

E. Notify trade of forthcoming campaign. Inform dealers and retailers early so that

they can take advantage of the campaign.

F. Billing and payments.

1) When the ads are run, you take care of billing the client and paying the bills to

media and production vendors.

2) The agency commission applies only to the cost of space or time.

3) A bill is sent for production costs; billed at cost plus a service charge.

.

4. The Traditional Agency Organization

A. Introduction.

1) Ad agencies traditionally come in all sizes and shapes.

2) An agency can be one person or hundreds.

3) As agencies grow they must add to their structure to handle all the functions of

a full-service agency.

4) Departments generally include:

a. The creative department.

b. Account services.

c. Marketing services.

d. Management and finance.

*****NOTES: Use Exhibit 5.4 Here*****

B. Creative Department.

1) Agencies are hired on the basis of their creative abilities.

2) The creative director is responsible for the care and growth of the creative

product.

3) Creative success is measured by the client’s results.

4) Because of the position’s responsibilities, the creative director is considered to

be a jack-of-all-trades.

5) A great strategy is essential to a great campaign

1. Writers, artists, print production directors, and TV managers report to the

creative director.

7) The creative director follows and manages the creative product from inception

to finished ad.

C. Account Services.

1) The vice-president in charge of account services is responsible for the

relationship between the agency and the client.

2) This vice-president must be familiar with all aspects of the client’s business if

marketing and advertising objectives are to be met.

3) Forms the basic advertising strategy to be employed by the agency and makes

sure it is on target.

4) Must present the total proposal to the client and make sure the client is satisfied

with the agency's work.

5) As the business grows, an account supervisor will appoint account executives

to serve as individual contacts with the various accounts.

1. The ad agency must stay ahead of the client’s needs if success is to be achieved.

*****NOTES: Use Exhibit 5.5 Here*****

D. Marketing Services.

1) The vice-president in charge of marketing services is responsible for media

planning and buying, for research, and for sales promotion.

2) This vice-president appoints a media director who is responsible for the

philosophy and planning of the use of media, the selection of specific media,

and for buying space and time.

3) As the agency grows, a staff of media buyers is added. They specialize in the

individual media.

4) A research director helps define marketing and copy goals.

5) A sales-promotion director takes care of premiums, coupons, and other dealer

aids and promotions.

E. Management and Finance.

1. Like all businesses, the agency needs an administrative head to take charge of

financial and accounting control, office management, and personnel.

5. The Continuing Evolution of the Agency

A. Introduction.

1. Decades ago, clients sought the advertising expertise of powerhouse individuals such as Leo Burnett, Bill Bernbach, David Ogilvy, Rosser Reeves, Howard Gossage, and Mary Wells.

1. This gave way to agencies less driven by famous individuals and more often driven by a collection of bright talent.

1. There has always been some sort of agency evolution taking place:

1. In the 80s agencies began to merge and restructure their organizations; a practice that will continue in the future.

1. The 90s brought major reengineering to better serve integrated and Web needs of clients, with some no longer calling themselves “advertising agencies.”

1. Agencies began to expand their expertise beyond traditional advertising and

marketing services, becoming known as brand communication companies.

1. Today, most major corporate marketing companies have the ability to manage their own product development, marketing, and media relations.

1. The former partnership with agencies has been replaced by a vendor- order taking relationship.

1. Prior to reengineering, agency account persons would meet separately with creatives, media, or public relations people, to coordinate and solve client problems.

1. But reengineering fostered an environment of teamwork in which key agency people meet together on a regular basis to discuss every aspect of a client account.

1. Agency pioneer Jay Chiat is quoted as saying that "the hierarchical structure (traditional agency), if not obsolete at present, is on its way."

1. Senior managers in traditional agencies spend up to 20% of their time on client business; in reengineered agencies, that time is 60%.

1. Agency teams say that their teams consist of 8-12 people.

B. Specialty Agencies

1. Some agencies primarily specialize in certain kinds of business – B2B, healthcare, entertainment, tourism, and other business specialties.

1. Some agencies are multicultural.

1. A big growth area includes Interactive agencies.

1. Each operates as any other agency, but their expertise is more narrow than reaching all consumers.

( *****Notes: Use Exhibit 5.6 Here***** )

C. Agency Size.

1. The size of agencies range from 1-2 people to 100s or 1000's.

1. Large agencies may offer more services, but are generally inflexible and

more expensive.

1. Small agencies promote that small-to-medium clients can be serviced by the agency’s senior management and creative.

1. An experienced agency executive, Brad Majors, made observations on agency

size.

1. Large/public agencies. Confined to large, multinational accounts and not

suited to serve small accounts in a profitable way.

1. Medium-sized agencies. A great source of creativity, and will continue to grow and hire strong talent. Not restricted by public ownership, they will continue to produce provocative work. Their popularity will make them targets for acquisition by larger agencies.

1. Smaller agencies. Will thrive, if cash flow and accounts receivable are managed and financed well in addition to rendering creative marketing.

1. Competing Accounts.

1. Clients do not generally approve an agency's handling companies, or products, in direct competition.

1. The client-agency relationship is a professional one, dealing with sensitive and confidential information such as sales data and marketing strategy.

1. Conflicts can arise as a result of a merger with a partner handling a client competitor. Such issues need to be addressed before a merger.

1. Some larger agencies have independent offices around the country, hoping that clients will not perceive possible conflicts.

1. Client-Agency Relationship Length.

1. Most relationships continue as long as clients feel satisfied with the services rendered.

1. Most contracts allow for a 90-day cancellation by either party.

1. Agencies can resign an account if they differ with the client's goal and the account is not profitable.

1. The average tenure of agency-client relationships has declined from 7.2 years to 5.3 years since 1984.

1. Agency of Record.

2. Large advertisers may employ a number of agencies to handle various divisions and products, appointing one, coordinating agency of record.

1. This organization serves as a team to work solely on the client's brand.

1. The lead agency (of record) makes the corporate contracts under which other agencies will conduct their work, keeping records of all decisions and placements of advertising.

1. Agency Multiple Offices.

0. Major agencies have offices throughout the United States.

0. Each office functions as an autonomous agency, serving different clients, drawing on the talents and services of the other offices.

0. The parent office primarily markets itself as a global network

0. Each office works primarily on its own accounts and protects its unique culture.

0. Large media service agencies also have multiple offices.

1. Global Agencies and Global Markets

A. Introduction.

1) Globalization has become a necessary part of business and advertising.

2) An agency must learn about cultural and market patterns and understand

consumers from a global perspective.

3) Small to medium-size agencies with limited resources have affiliated globally

with agencies or independent networks to serve clients and give advice.

4) Advertisers also have the option of hiring a local agency in the country in which

they are doing business.

5) JWT has 315 offices in 90 countries.

1. Use global teams to manage.

1. Use a global account director known as a Director-in-charge system.

1. Employ regional directors for specific groups of countries.

1. Each worldwide client is represented by a global business director.

B. Global Ad Centers & Global Markets.

1) The leading international advertising centers are New York and Tokyo.

2) Other leaders are London, Paris, Chicago, Los Angeles and others.

3) Setting up a foreign office can be very complex. Problems might include:

a. Each country often has its own language.

b. Buying habits.

c. Ways of living.

d. Mores.

e. Business methods.

f. Marketing traditions.

g. Laws.

4) Many agencies have had success in the international market by purchasing

successful foreign agencies, and by retaining their personnel have gained a

competitive edge in the international arena.

1. Today, good ideas can come from anywhere in the world.

*****NOTES: Use Exhibit 5.7 Here*****

C. Global Marketing

1) Success stems from product positioning that is relevant to local consumer

needs which vary by culture.

2) While cultures vary, people's emotions are very similar, regarding love, hate,

fear, joy, envy, greed, patriotism, family, etc.

3). Usually best to create advertising locally from a worldwide plan and strategy to

maintain the desired brand image.

4) Small companies seeking global branding face a bumpy road.

5) Companies face a full complement of strong multinational and regional

competitors.

1. As the world gets smaller, there needs to be brand consistency so people don’t

get confused as they move from market (country) to market.

D. Global Production Efficiencies.

1) Cost efficiencies in production of global advertising motivate advertisers to

seek a single world execution. This also helps to build the same global brand

equity.

2) Advertising must be presented in relevant and meaningful ways in context with

local environments.

3) Executions need to be customized to local markets so that consumers can relate

to and empathize with advertising.

4) Simple translation of ad messages alone is dangerous and can result in

embarrassment.

*****NOTES: Use Exhibit 5.8 Here*****

1. Agency Networks

1. Small and medium-sized companies have working agreements, referred to as agency networks, to help gather and share market information.

1. The Mega-Agency Holding Companies. To handle possible account conflicts, agency networks would serve as holding companies, owning individual agencies.

1. Individual agencies operate freely and independently.

1. These agencies can handle competing brands.

1. But there are still account conflict problems.

1. Agency networks have world-wide connections and support.

1. London agency Saatchi & Saatchi PLC led the way for global advertising.

1. The largest global agencies today include: Dentsu (Tokyo), WWP Group (London), Omnicom (New York), and Publicis Groupe (Paris).

1. See Advantage Point 5.2 for holdings of the Omnicom Group.

1. Mega-agency advantages and disadvantages.

1. Large size and great reservoir of talent

1. Able to shift portions of accounts from one agency to another.

1. Most important disadvantage is conflicts with competing accounts.

1. Ability of agencies depends on: unit or team composition; size and structure of team; the innovative talents of individuals. Each has its own particular character.

1. Some criticize mega-agencies, pointing to "flabby" organizations that have become more revenue models than consumer solution models.

1. Other Advertising Services

1. New services are continually springing up in competition with advertising agencies.

1. Talent & Production Agencies Creating Creative.

1. A new resource for clients is the melding of talent sources to develop ad concepts.

1. Examples include Creative Artists Agency (CAA), a talent and creative organization that involves entertainment starts, writers, directors, and others.

1. Insiders believe that talent agencies can add another dimension to the advertising agency and client resources.

1. Independent Creative Services.

1. Some advertisers seek top creative talent on a freelance, per-job basis.

1. Full-time shops, or creative boutiques, have no media department, no researchers, and no account executives because they focus solely on creative ideas for clients.

1. A La Carte Agency.

1. Many agencies offer, for a fee, just part of their total services that advertisers want.

1. Used mostly for creative services and for media planning and placement.

1. Many agencies have spun-off their media departments into independent divisions.

1. A commission of 3-5% is charged for handling only the media portion of an account.

1. In-House Agency.

1. Some advertisers have set up their own internal agencies, called in-house agencies.

1. This form of an agency can employ a creative service to originate advertising for a fee or markup.

1. This form can buy space and time itself or employ a media-buying service.

1. As a rule, this form of an agency is an administrative center for other activities and has a minimum staff.

1. In-house agencies are generally created to save money or give advertisers more control over every aspect of their business.

1. Industrial companies with highly technical products may find it more efficient to have in-house technical people prepare ads.

*****NOTES: Use Exhibits 5.9 and 5.10 Here *****

1. F. Rolodex Agency.

1. Similar to hiring freelance, except experts are hired (such as marketing, creative strategy, writing, art direction) who work on a project basis.

1. Claims to be able to give advertisers expertise that small full-service agencies cannot match.

1. Media -Buying Services.

1. As all the new media developed, everyone had to be more creative in developing plans to meet the consumer’s changing media habits.

1. In the mid 90s advertisers began to unbundle media or give media buys to independent media-buying services.

1. Efficiency is the goal.

1. There are four main reasons for these newly formed media agencies:

1. Media agencies are stronger, with better resources to explore new areas within media.

1. The fragmentation of target audiences and media vehicles have made media more important than ever before

1. It has the potential to be a major profit center.

1. The reciprocal action allows media agencies to acquire accounts that work with other parent agencies for their creative work.

1. Mega-advertisers have consolidated multiple accounts to obtain better rates in their media buying.

1. In-House Media Services.

1. Some advertisers have taken the media buying function in-house so they will have more control over the function.

1. This does not appear to be a trend.

1. Forms of Agency Compensation

1. Introduction

1. Historically, agency compensation has been fairly standardized since the 1930s.

1. An agency received a commission from the media for advertising placed by the agency.

1. But compensation arrangements take many forms:

1. Fixed commissions less than 15 percent.

1. Sliding scales based upon client expenditures.

1. Flat-fee arrangements agreed upon by clients and agency.

1. Performance-based systems.

1. Labor-based fee-plus-profit arrangements.

1. Media commissions.

1. The traditional 15 percent commission.

1. A fixed rate less than 15 percent, agreed by client and agency; the larger the budget, the lower the rate.

1. With a sliding-scale commission agreement, a fixed commission is based upon a certain expenditure.

1. Media payment is complicated by independent media agencies which may negotiate contracts.

1. Production commissions or markups. Agencies subcontract production work and charge the client the cost plus a commission

( *****NOTES: Use Exhibit 5.11 Here***** )

.

1. Fee arrangements -- when 15 percent is not enough to earn a fair profit, the agency may negotiate a fee.

1. A number of options are available:

a. Cost-based fee.

b. Cost-plus fee.

1. Fixed fee.

1. Sliding fee

1. Performance fee. Compensation based upon a predetermined goal.

0. The fee could exceed 15 percent if goals are exceeded.

0. The fee could be less than 15 percent if the agency fails to meet the goal.

1. In 2002, the American Association of Advertising Agencies and the Association of National Advertisers, Inc. issued a joint position paper outlining guidelines for compensation (two sections) between agencies and advertisers.

1. Guiding Principles.

1. Best and Worst Practices.

1. Many marketers have replaced the traditional commission system of paying media commissions with performance-based compensation.

1. Most agencies aim for 20 percent profit on each account, above personnel and overhead costs.

1. A caution is raised that compensation should reflect a consistent relationship between income generated and the cost of providing services required by the clients.

1. Other Services

1. Barter.

1. One way for an advertiser or agency to buy media below the rate card price is barter.

1. Barter companies often become brokers or wholesalers of broadcast time.

1. They build inventories and then sell the time.

1. Drawback is that weaker stations in a market are more apt to use it the most.

1. Air time gained in barter is often poor air time.

1. However, this air time is often a good value for the low rate paid.

1. Research Services.

1. Original research is often necessary and can be conducted by the advertiser, the agency, or an independent research firm.

1. Research often falls under the control of the account planner.

1. If the account planner is responsible for strategic planning, then research helps to link this planning to a consumer's point of view.

1. Account planners are responsible for all research – quantitative and qualitative.

1. Small agencies offer little in-house research staffing.

1. Syndicated research services offer customer-made research reports to advertisers and their agencies.

1. Methods of gathering research include:

1. Consumer field surveys (personal, telephone, or self-administered).

1. Focus groups.

1. Consumer panels.

1. Continuous tracking studies.

1. Cable testing of commercials.

1. Image studies.

1. Electronic questionnaires.

1. Opinion surveys.

1. Shopping center intercepts.

1. Media-mix tests.

1. Managing Integrated Brands.

1. A brand needs a single guiding architect to be successful across markets and media.

1. An agency provides a strong link between strategy and executions because both functions are housed under the same roof.

1. On the downside, many agencies still have a bias toward media advertising.

1. Agency conglomerate.

1. Many agencies approach integration by acquiring other companies with complementary capabilities.

1. The hope is that advertisers will like the opportunity to "one-stop shop" for coordinated communications.

1. The general consensus is that this approach does not work well. The units often do not blend well and are rivals for the advertiser’s budget, and each unit within the conglomerate isn’t necessarily best suited to solve the problem at hand.

1. In-house Generalist Agency.

1. Another option is to expand the traditional agency's functions to include public relations and promotions.

1. This concept works well if the agency has the talent to handle the new services or has clients or revenues to support a diverse staff.

1. Service Cluster.

1. A service cluster team is a group of people drawn together from all agency affiliate organizations.

1. The aim is to serve client needs.

1. A key characteristic is that this form focuses on creating ideas rather than ads.

1. Communication integrator.

1. In this case, the agency draws from outside sources and integrates these services for the brands.

1. Brand Strategy In-House

1. Some advertisers don’t rely on the agency for managing brand strategy.

1. Find it beneficial to employ a team of specialized communications firms.

1. The advertiser may develop specialized expertise – research, media buying, and strategy consulting.