The Ad Agency System is Broken

It’s not you, it’s me. Well, maybe it’s you too.
Advertising agencies have been around over 100 years. They started as “agents” as these ad companies would simply be a middle man for their clients, taking the ad idea and contracting with the appropriate ad venue, “placing” the ad, and they would get a commission from the media (print and later radio and television.) It wasn’t until later that these ad agents would actually start creating those ads. And that’s how the world of advertising and ad agencies was born. 
Over years this evolved into a symbiotic love-hate relationship between the agency and the client. As we look at the fictional relationships like on the TV show Mad Men, or perhaps read about current events with bigger clients and their agency relationships in Adweek or Ad Age, we realize that these relationships are rather complicated. And constantly evolving.
But it isn’t just the billion dollar players that have issues. It’s also complicated for smaller businesses and their smaller ad agencies. And it’s broken…

It’s broke for the ad agency
Today ad agencies are fighting for lost revenues. Where they once got ample agency commissions from the media when placing ads, those commissions have gone away. Where they once made profits on “mark-ups” when bringing in outside vendors like printing companies to print a brochure, those have gone away either from in-house procurement departments or everything going digital. (That .pdf file that can be downloaded just made a majority of the printing markups obsolete.) Stock photo and other services have also cut into profit margins. 
One major factor for the ad agency is the increasing trend over the last decade for clients to have an “in-house” creative department. Often the agency is teaching the client how to do the work, or creating the templates, and the work then stays in-house. In the past, agencies would put in extra time up front (to make sure the work was at its best) knowing that they would make up for lost time on the backend as they produced the different variations of the ad. This is no longer part of the picture when an in-house department takes over the production.

It’s broke for the client
We’ve heard over and over again how a company will hire an ad agency, hearing all kinds of promises, spend a ton of money, and then would not get the results that they expected. Now this part isn’t new and it has nothing to do with recent trends. And this is totally dependent on a number of factors. 
Is the agency right for the client? Different agencies have different capabilities. Some of their expertise can work wonders for some clients. And for other clients, they’re simply going to strike out. 
And some are just not as good as others. It’s true in every business. With the agency, it depends on the people working there. And sometimes people will come and go, so work at one time might not reflect the same level of work that you would get at other times.
Regardless, an agency can’t promise anything really. They can share thinking, they can share past examples, but future results can only be proven by sticking your neck out and actually doing the work.
Still, the complaint from the business side is that the business hires an ad agency, they pay them to do a lot of work, and the agency gets paid regardless of whether the work performs or not. 

Pay For Performance (P4P)
Pay for performance is an approach where the agency gets compensated based on not just doing the work, but also from the results of the work. The better the company does, the better the agency does. Literally.
How does P4P work? That’s the tougher part. There are no set formulas to plug in, every situation is different. At the Gunter Agency, we are working with one company on a very small monthly retainer (a fraction of what a typical retainer would be) but if certain annual sales goals are met, the agency gets bonuses and can even acquire equity in the company. 
The company likes this because they want to grow but couldn’t afford the rebrand, new website, advertising plan and messages and all of the marketing and branding components needed to build their business. But, if they hit their sales goals, they know they could pay for it at that time.
Our agency likes this because we are confident in our ability to work with the company to reach these goals, and are confident in the future value of the company that the equity would bring. So the agency is willing to put a lot of work up front for a potentially larger payout later. 

A partnership develops
What happens is that a true partnership and real trust develops. In this particular case, Covid-19 came into play during the agreement time. Our agency decided to not charge the agreed upon monthly fees to make sure the business has working capital. (It’s not a lot, but every little bit counts when you’re being hit with something like this.) Both parties understand  that if we are working for mutual success, we have to work together in every aspect of the business. 
A P4P model won’t work for everyone. In fact, it is very safe to say that it won’t work for most companies. But in the right circumstances, a P4P situation can fix some of the things that are broke in the current ad agency/client relationship and system.