Tuesday, November 3rd, 2009

Why The Traditional Advertising Agency Model Is Broken

This is a guest post by Ad Hustler

Not long ago “Traditional Advertising Agencies” ruled the advertising landscape. Companies would hire these traditional agencies as their “agencies of record” and the agency would put together their media plans, do their creative work and negotiate their media buys. Advertising agencies would do all of this for a 15% commission of the monthly media buys. To give you insight as to how traditional advertising agencies make money here is a little tidbit of info.

Most traditional media sources have 2 prices. The net price and the gross price. Traditional media is supposed to give advertising agencies the net price and advertisers asking for pricing directly from the media source are supposed to be given the gross price. The difference between net and gross pricing is 15% and that is the agency profit margin.

The problem with this model is that the ad agency and the advertiser do not have their interests aligned. In order for the agency to make more profit, they have to push more advertising on their client. They have to encourage the client to spend more whether or not that advertising is actually effective. If they don’t encourage their client to spend more money, they aren’t acting in their own self interest as an ad agency.

Affiliate Networks & Affiliate marketers already see the future. The reason that the model works so well and is so efficient is that everyone’s interests are aligned.

Advertisers make more money when Affiliate Networks make more money.
Affiliate Networks make more money when Affiliates make more money.
Affiliates make more money when everyone else makes more money.

No 1 party makes more money without all of the others benefiting as well. The model works because interests are aligned.

Unless the traditional advertising agency figures out a way to align their interests with their clients interests they may be a dying breed.

Why do you as an affiliate care?

Knowledge is power. Affiliates are a powerful force on the internet and many affiliates pursue other avenues of revenue. Knowing the issues plaguing the traditional advertising agency gives you the power to create websites, services and projects that align the interests of both publishers and advertisers rendering the traditional agency near obsolete.

Subscribe To Ad Hustler


You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

21 Responses

November 4, 2009

I am a tad confused as to the relevance of your comment, Contextual!

In any case, on to the matter at hand. Traditional agencies have been suffering big time, but there will always be room for them in their more traditional fields. The creativity that they bring to campaigns and the like is what corporates are after, and is not something many affiliates can really offer.

The traditional Above The Line & Below The Line marketing sectors has been joined by On-Line marketing, and here agencies definitely fall short.

Am I right or wrong here guys? Don’t want to rub anybody up the wrong way, OK!


November 4, 2009

I would kinda agree on what the commenter above has to say in that traditional advertising agencies will still continue to have a place in their more traditional fields. But as more and more people resort to non-traditional means of getting info/commodities, the more these traditional agencies will be hurting.


November 4, 2009

Kris,

Great point! The other mantra here absolute power corrupts absolutely. Meaning before recent time of the IM’er. The big guy were the only ones out there. Now we are a force to recon with and they are to late because for greed.

Thanks Kris,

Rob
Robertchic.com


November 5, 2009

In my opinion it is pretty simple to explain why traditional advertising agency is not doing so well, it’s because of competition and the general nature of a free market society, basically someone else found how to do it better, and everyone (us the consumers/marketers/affiliates) we find their method better thus we go to it. I hope that made sense for you guys… I am just applying some Microeconomic principles I’ve been learning

Till then,

Jean


November 5, 2009

Interesting post AdHustler. I agree that the ad agency model does not sound effective. A company should be more worried about how efficient their advertising is, not simply how much more can they pump into advertising.


November 5, 2009

That’s a good post. I agree with it basically.

If you compare classical media agencies with affiliate networks you notice that most media agencies do the media buys themselves. The media agency is like the affiliate network + the affiliate together.

There is also an interesting 4th party, which is the media itself, or the websites for that matter. A website would prefer non-performance oriented buys (CPM) over performance-based (CPC or even worse CPA) most of the time. The reason is if the website is accepting CPC or CPA, it gets depended on the success of a campaign, which is totally out of their hands. Of course it may also be that the website has just not the right audience and pretends it has, in order to get the CPM-money.
It would be interesting to add the media to the euqation, and possibly even the customer in the end :) Because those make the whole advertising cycle complete.


November 6, 2009

I agree with you. The model works well because the interests are aligned. The quality of the advertisements is what is more important. It must be client pleasing.
Very well written and thanks for sharing.


November 6, 2009

@Thumoney

“If you compare classical media agencies with affiliate networks you notice that most media agencies do the media buys themselves. The media agency is like the affiliate network + the affiliate together.”

That’s an interesting and true deduction. The only serious difference is that the payment to the agency is not performance based and that’s the major problem.


November 6, 2009

Nice points to read. I am not big learner on advertising media but one thing I always believe – ‘Team has the power to make thing possible’. The problem with traditional media is, they always try to take over each other, sometime try to blame other to show they are better where affiliate network try to build a new relationship. It’s something like viral advertising. Just ask yourselves, how many of us know a name of any traditional media and how many of us know some name on affiliate media?


November 6, 2009

People are becoming ad blind, I believe advertising will become less and less effective, therefore the price of advertising should go down with it…


November 8, 2009

>> The problem with this model is that the ad agency and the advertiser do not have their interests aligned.

Actually, at one point in time, there was this thing called Scientific Advertising, where the results of advertisements were actually tracked. Ad agencies actually had to provide actual numbers in terms of the improvements they delivered to their customers.


November 8, 2009

I agree . The model would works well because the interests are pointed out. The quality of the advertisements is what is more important. It must be client pleasing.
Thanksfor sharing.


November 9, 2009

My wife works in the advertising industry and sees it slowly unraveling. The companies that will survive are the ones that can show their customers results. Over time you will start to see more advertising based on performance rather than just ad space.


November 10, 2009

Today we had seen many kinda of ads. Today we see so much crowed in this industry and these are not so much effective. So the price is going down.


Great post. Because affiliate networks rely on the the advertisers and affiliates to profit, they generally supply you as an affiliate with the best tools and ad copy.


November 16, 2009

Yes I agree with your opinion. Day be day blogger are increasing and so competitor also increasing, So advertiser can buy ad with low price.


November 17, 2009

yes, now it looks like everywhere you go, you see an ad. The problem is that the firms that want to adverties their products actually want it to be sold. The results are most important for them. In my opinion, the advertising companies that won’t have good results will be out.


November 24, 2009

Companies thriving in the rapidly changing marketing industry such as Direct Agents have been promoting this idea for years. I think traditional agencies are starting to realize the power of this win-win situation also.


November 25, 2009

Hey,
I’m agree with your ideas. That works well because the interests are aligned. The quality of the advertisements is what is more important. It must be client pleasing.
Thanks for a lot….


December 1, 2009
Ben

sure. the only advantage an ad agency would have over say an affiliate is the power to help create or shape a brand. its difficult to put an ROI on that. we’re talking about big advertisers looking to spend millions of dollars so consumers view their company/product in a certain way. for example coke has spent millions if not billions of dollars to advertise/market their coke brand image. Coke is one of the most recognizable brands in the world. now that brand is certainly worth a lot but we cannot put a specific number on it. Their brand image helps Coke sell billions of dollars worth of product every year. Obviously, tracking sales off line is not as easy as it is on the internet.

as an affiliate i certainly agree that the model is broken in terms of a performance driven specific ROI. traditional ad agencies interests are in line with their clients buying more ad space. the ad agencies will have to adopt to meet the needs and demands of their clients in the future.


December 7, 2009

To be honest I saw some traditional advertising agencies falling down because their owners didn’t even tried to follow modern trends and ways of presenting information. Nowadays web marketing is even more important than tradition advertising. Specialists should know that.