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Over the last weeks I traveled to South Africa and a few European countries to meet with colleagues and some local industry experts, all with the goal to better understand how marketing agencies are dealing with the accelerating influence of digital marketing. Independent of how brands are spending their marketing investments, from less than 2% in South Africa to over 30% in the UK on digital and mobile activities, a lot of the marketers on the service side of our discipline are asking the question of how they can truly make a decent margin on digital work. The question has moved from how much they should invest in the build out of their digital capabilities into the challenge of how to make money with it.

The large agency holding companies (IPG, WPP, Omnicom, Publicis) report EBITA numbers of between 6% on the low end and 15% on the high end. It’s very difficult to find out the profit margins of the various pure digital agencies within the holding companies, so one has to rely on estimates and insights derived from industry experts. There definitely seems to be a challenge for larger traditional agencies to make decent margins on their digital work. After discussing this with a few knowledgeable marketers some explanations rise to the top:

• Scale: Even most pure digital players had a difficult time to create a decent margin until they reached a sufficient size to not just recoup initial investments but have the expertise and size to monetize on their offering. Size does matter. Interestingly enough smaller very specialized boutique agencies can make good money, too, due to low overhead cost and flexible delivery mechanisms. But most small digital departments within a large marketing offering have huge trouble to generate a positive short or medium term ROI on their personnel and infrastructure expenses.
• Premium versus Discount pricing: A lot of the large marketing service firms know that they have to expand their digital offering. Therefore they are willing to discount their digital work to enter this fast growing discipline. After winning the work (by buying it through cut throat prices) they often realize that they can not deliver the work with sufficient quality while simultaneously loosing money. It takes take them much longer than ever envisioned to build a profitable digital practice, and quite a few of them still have not achieved it.
• Lack of paid search capability: A lot of the marketing service firms have either still not realized that paid search is almost 2/3 of all digital spend, or they lack the internal media planning expertise to build it out in a smart manner. They are victims of the separation of creative and media offerings in the 80ies and 90ies. For a lot of these companies it might be too late to ever regain the lost territory.
• Resource allocation: The haste of hiring digital talent leaves quite a few large marketing service players with too much unbillable or incorrectly hired expertise that drags down any profitability. It’s very challenging for traditional marketers to identify and attract the right digital personnel that can build a well oiled delivery machine while creating brilliantly engaging and business building digital programs.

While a lot of marketers at service firms talk about the urgent need to expand the digital side of their business, they are flying blind in how to make it happen without eroding their good margin from their more traditional core business. It will be interesting to observe of who is able to make this transition to not only great but profitable digital work.

Have been really enjoying browsing the archives at explore.org there's something just right about their 2-5 minute documentaries (far from the bustle of TV & really involved in their subjects whether it's wildlife, dance or spiritualities). I'd thoroughly recommend checking it out when you need a break from the bustle of Twitter, yet more blah about Avatar, tabloid scandals and whatever is tying up your work brain at the moment :J

Too much "Big Brother", or a great idea?

Will Microsoft's search engine, Bing see a surge in use because of this?

Will IPv6 help?

From Washington Post Google to enlist NSA to help ward off cyberattacks.

The world's largest Internet search company and the world's most powerful electronic surveillance organization are teaming up in the name of cybersecurity.

The sources said the deal does not mean the NSA will be viewing users' searches or e-mail accounts or that Google will be sharing proprietary data.

Over the past decade, other Silicon Valley companies have quietly turned to the NSA for guidance in protecting their networks.






Submit your great idea for royalties We Invest In Great Ideas

My friend and business partner, Dave Reibstein of Wharton, writes an advice column called Ask Dave where former students write in with questions on marketing metrics and he offers some sage advice. This recent correspondence caught my attention for its relevance and timeliness for all of you with new fiscal years beginning soon…

Dear Dave –

I’m a finance manager at a large industrial manufacturer. I often sit in the meetings where marketing comes in and shows us how low our marketing spend is compared to our competitors, and then asks for more money.

Maybe I’m wrong, but I don’t see that matching competitor spend is a path to success, is it? How should I coach our marketing team about what a better analysis would look like and what information they should bring to the table?

Sincerely –
Geoff D. in Chicago


Dear Geoff —

The right amount of spend is indeed a relative thing. Our product appeal, our pricing, our packaging, and just about every aspect of our value proposition are only important RELATIVE to the alternatives the customer has. Likewise, our spending is also, in part, only effective RELATIVE to what others are spending. But there are huge risks tied to making that relative spend the center of any strategy, as we are often following moves that deserved no response.

For example:

• A while back there was a “holey war” between laundry iron manufacturers. One first put holes on the bottom of their iron allowing for steaming of the linens as they were being ironed. The competitor responded by adding more holes to their own model. Then the race was on to see who could add more and more holes until the number of holes was well beyond what the customer cared about.

• Pepsi chased Coke into the low carb soft drink market (half the calories and half the carbs of normal colas). Hundreds of millions were spent before anyone realized that consumers that cared about their carb intake wanted ZERO carbs and calories, not half.

• P&G chased after Kimberly Clark in the introduction of moistened toilet tissue. Both were greeted with failure in this market.

In each case, it was easier to approve the budgets for these programs once it was learned that competition was going to be moving there too. Fear of falling behind is a powerful motivator. The aversion to loss is much greater than the attraction of gain (see Prospect Theory). Marketing managers who use competitive spending as a primary justification for their own spending are (most often unknowingly) playing to this loss-aversion instinct.

But when we measure success on a relative basis (e.g. “share of voice” or “market share”), our behavior is only intended to keep up with competition. Also, the notion that we shouldn’t spend on something until we witness competition doing so implies that competition knows more about the right action than we do, which is very often not true. So, it results in the unwise being led by the same. Even worse it results in never taking the steps to actually get ahead of the competition.

The proven path to success is careful analysis of what makes a difference. Rigorous testing of historical data, or experimentation with spending levels to see what really does work will allow for taking progressive acts without having to wait for competition to move ahead. Smarter companies seem to gauge success on the absolutely impact marketing has on the financial goals of the firm.

It all comes down to what your mother always told you… “have a mind of your own”.

_________________________

Pat LaPointe is Managing Partner at MarketingNPV – specialty advisors on measuring payback on marketing investments, and publishers of MarketingNPV Journal available online free at www.MarketingNPV.com.