The Rundown: The myths of agency economics
The economics of the agency model keep getting more complicated.
The issues are well known: There are fewer retained agency-of-record accounts to go around, leading to a rise in project-based work. Plus, increased competition, more being done in-house and the increased involvement of procurement throughout the relationship means that running an agency is a little bit of an “exercise in uncertainty,” as one indie agency CEO put to me recently.
But there also seem to be growing delusions from major company execs when it comes to solving for these issues. One argument I hear often: Agencies saying they’ll take on below-profit project work with the hope that it leads to more business down the line, and that they will be able to charge more for work “later.” Once clients get to know them, the argument goes, they’ll understand that it’s worth paying them more.
The argument may have held merit in the past, said another agency CEO, because agencies could present cost of living increases and other factors as ways to raise rates. But with the shift to more project-based work, that rationale doesn’t stand up.
A companion myth: Economies of scale. When rates are calculated on an FTE basis, taking on smaller pieces of work with the hope that a bigger piece later will somehow change an agency’s economics simply isn’t realistic. “Clients are so comfortable just kicking us off projects and switching agencies that this broken idea that we can charge them more at some vague point down the line is ridiculous,” this agency CEO said. “It might be one of the biggest myths around.” — Shareen Pathak
DTCtech has arrived
DTC land may have a new battleground. Technology companies want to capitalize on the direct-to-consumer boom, and DTC brands increasingly need the assist to scale. Enter web platforms like Shopify and Mailchimp, production provider Backbone, investment firms like The DTX Company and brand groups like Iris Nova, who are all in a race to figure out what tools they can build that will entice startup brands to their services.
A power-in-numbers, open-source playbook is coming together after a period of individual brand growth. The value proposition coming from these technology players: Scaling a single retail brand is hard. But rather than putting brands up for sale to big conglomerates and feeding more power back to the original market leaders, building efficiencies into these brands’ strategies by sharing resources around customer data and logistics could give small companies a better chance at survival. Increasingly, it’s tech companies that see an opportunity in helping them do so. — Hilary Milnes
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