Advertising's Brave New World

Many predicted the death of advertising over the years (good examples can be found here and here). From pricing pressures to new technologies and a media choice explosion, plenty of folks have been eager to drive a stake into the heart of the ad biz.

The industry has not only survived, but, according to the numbers, is on the way back in a big way. Most predictions of online advertising spending are positive. Offline spending is rising as the recovery continues. Online advertising, email, and search engine optimization haven’t cut agencies out of the business, as many predicted. If anything, clients now realize this stuff, done well, is labor intensive and they require outside help.

But is anyone making any money?

Hard to say. Many big agencies and conglomerates have had problems and were forced to cut staff over the past few years. As the economy improves, there’s some hiring. But the market’s still pretty tough. Agencies today have been spooked by the troubles of the last couple of years and are skittish about hiring. Like the rest of the business world, agencies are doing more with less to build themselves back up.

Are we out of the woods yet? It’s tempting for us survivors to pat ourselves on the back and assume the worst is over.

It’s not.

Changing Business Models

Let me clarify. We’re not going to slide back into recession. But those of us in the ad biz need to rethink our core business models to be ready for new realities.

In the beginning, ad agencies were “agents” for publishers who sold advertising. In return for selling ad space, agencies were rewarded with commissions. Once sold, ad space must be filled. So agencies began to offer creative services to produce advertising. Over time, the creative function (sexier, to be sure) overshadowed media sales. Ad agencies became known as creative places, although they still made their money selling ad space and were generally paid on commission. And everything was good with the world.

According to Leslie Stark, the traditional commission model began its downhill slide in the late ’80s, when TWA forced Ogilvy & Mather to reduce its 15 percent commission or lose the account. Faced with losing a $60 million client, it repitched the account with a 12.5 percent commission. Agency profits have been on a downhill course ever since.

Things ain’t what they used to be. But the real change is coming now. The commission model itself (and all the attendant aspects of long-term relationships, expensive pitches, and spec creative pitches) is doomed. Goodbye, old ways of doing business. All this won’t happen overnight, but it will happen.

Advertising creation is, for the most part, a buyer’s market. The economic downturn and marketplace emphasis on short-term return on investment, financial accountability, outsourcing, and pricing flexibility make clients unwilling to lock into long-term relationships that don’t allow flexibility or access to talent and markets they need in a hyper-speed world. Clients are more likely to outsource pieces of business to specialized shops: buying firms, direct-response houses, product designers, interactive experts, than they are to hand the whole thing over to one big agency. Clients know they can shop for the best price on the functions they need. And they do. It was bound to happen, then the recession accelerated the process. We’ve gotta deal with it.

How? By gearing up for the world of projects.

Under the old model, agencies knew they’d lose money at the start of a relationship. Spec creative, huge pitches, new personnel, campaign development — all the stuff one does with a new client — were bound to lose money. Once the campaign got rolling and went on autopilot, media profits would offset the initial costs, and all would be well. It made sense to lose money at first. You made it back over the life of the contract.

This doesn’t work in the new world of short-term projects. Blowing $50,000 on a pitch to win business worth $100,000 means you won’t make a dime. Going overboard with creative concepts and client service at the beginning of a project means you lose money from the start. You may make it up if a project leads to another, but not if you repitch the business.

In the future, relationships will be replaced by a series of linked projects. No more keeping a client for years (unless we really screw up). Instead, we must be ready to jump to the next client and the next project on short notice.

The Number One Asset: Time

Fortunately, there are models for operating in this kind of environment. Business service industries, such as legal, financial, and consulting have operated like this for a long time. Although they have different ways of doing things, they know there’s one asset more precious than any other: their time.

In a project world, you must track time, bill time, and sell time. Don’t work for free and hope to make it up later. Don’t give away work in new business pitches. Don’t do a little extra for a relationship that isn’t guaranteed to be there next month. Give good service, but get paid for the time you put into a job.

Be ready for the brave new world of projects. For many in the interactive biz, this is probably the way you do business already. The old agency types are facing big changes, the biggest of which is clients who realize this is what they want. Advertising isn’t dead. It’s just changing into something we may not recognize in a decade or so.