First published in City A.M.
Ask anyone working in advertising how it’s going and 99 times out of 100 you’ll get a tale of just how busy they are.
Early starts, late nights and weekends in the office are a regular feature of life in any creative agency. Yet it’s a curious feature of advertising agencies that the amount of work being done by the agency’s staff doesn’t correlate to end of year profits in the way it would if we were running a chocolate factory, or a novelty gift mail-order business.
To understand why, you only need to look at the creative agency business market, where you’ll find a long line of agencies queuing up to give away their strategic and creative thinking for free as part of a creative pitch.
Fair and open competitive tenders are an important part of any free market, including the advertising industry. But it’s the way some creative agencies approach these opportunities that is eroding our margins, diminishing our sense of our own worth and, I suspect, undermining our credibility with client procurement teams and finance officers.
Deciding to take part in a creative pitch is a huge decision for an agency.
You can put a number on the cost of that decision for the agency and for a major pitch it’ll easily reach six-figures. With that cost figure in mind it becomes much easier to weigh up the pitch opportunity and decide whether to proceed. The key variables needed to do this are the expected annual revenue from the client if the pitch is successful, the likelihood of revenues repeating in years two, three and beyond and – crucially – the number of agencies pitching. The last of these is particularly important and I still find it astonishing that agencies will agree to pitch without knowing the number of horses in the race.
Our calculations have shown us that in most cases participating in a three-way pitch (including us) makes financial sense, that a four-way pitch makes sense depending on the size of the prize, and that it’s difficult to justify taking part in any pitch with more than four competitors. We’ve turned down several otherwise attractive opportunities based on this simple analysis and by stopping ourselves giving away work for free we’ve improved profitability.
Many economic models rest on the assumption that firms are rational and that they maximise profits.
Clearly that’s not the case here. So why do creative agencies behave in this bizarre way? First, because our market has low barriers to entry, is hugely competitive, and so every new business opportunity is prized and pursued almost regardless of quality. Second, the industry still retains an element of show-biz and agencies lust after the new business headline that shows the world how well they’re doing. The dream of trumpeting “Agency X Wins Brand Y” has led many an agency into a six-way pitch for a small one-off project only to wonder why they bothered when the first account profitability figures come through.
Finally, our business is full of creative people who enjoy the creative process, and who will sometimes put basic financial analysis to one side for the chance to work on an appealing brand. For all of these reasons, some agencies will continue to pitch themselves into the ground.