what’s new business worth?
In the week in which Innocent announced they were reviewing their advertising
account, reportedly for the sixth time in five years, Campaign magazine ran an
article entitled ‘Are some client pitches best avoided?’
The answer to this, like the answer to the
question, ‘Should some sexual overtures be rebuffed?’ is obviously, ‘Yes.’
In Innocent's defence, at both their last two
agencies (Fallon and RKCR) the pitch teams deserted them to start breakaway
agencies not long after their appointment. But some clients do seem to have a
problem with commitment and some agencies allow them to continue with their
promiscuous behavior.
As Tina Fegent says in the Campaign article,
“(This is) an oversupplied marketplace. There is too much choice out there and
most agencies say yes to opportunities.”
James Whitehead of JWT is quoted as saying, “I take the
optimistic view that there’s always the potential for the next relationship to
be the pairing that lasts – that delivers the right work, the right chemistry
and the right results.”
Of course, we respect that kind of positive attitude
here at Welcome to Optimism, but the combination of agencies hoping for the
best, an oversupplied and highly competitive market, and pressure on agencies to win business at almost any cost can lead
to a desperate scramble to get onto any pitch list.
What is a new business win actually worth?
Certainly not the headline figures quoted in trade press articles; these
usually refer to a claimed media billings figure.
Let's imagine that Client X is reviewing their
“£3 million UK account”. Experience and rough rule of thumb suggests that the
winning creative agency, after a long, hard-fought and expensive unpaid pitch process,
can expect an annual fee of, say, £300,000. (Might be a bit more, could be
less.) For that, these days, they may be expected not just to do the ads, but
also digital, design, POS, and various other bits and bobs too.
That £300K needs to cover not just the cost of
pitching and the new account’s direct salary costs but also overheads, rent,
equipment, travel and so on, before the agency makes any profit. £300k won’t
buy you much time across the year, by the time you factor in a creative team, a
creative director, a planner, an account handler or two, a producer, a
technologist, a designer, etc. Either the agency is going to lose money on it,
or the client is going to get poor service. Or a bit of both. Agencies tend to
charge similar rates; the big variable is the amount of time they put into the
work.
So why would an agency pitch for an account that
they probably won't win (usually a 1 in 4 chance, sometimes 1 in 6 or worse)
and will probably lose money on if they do win?
Some suggested reasons:
– New business has value beyond money: positive PR, and the appearance
of momentum and success (which breeds more success.
– Winning pitches is fun and boosts morale.
– Agency managers pressured by their bosses can point to wins to show that
they’re making progress
– Every agency believes that they can beat their competitors
– Agencies and clients can be loath to discuss money at pitch stage. Few
clients will volunteer the information, “This is how much money we can afford
to spend on fees.” Many agencies won’t directly ask the client, “What will this
account be worth in fees if we win it?”
– Some agencies will take on additional work without hiring additional
people, so their revenue goes up but costs stay flat. By working people at more
than 100% capacity they can generate profit from ‘unprofitable’ business.
This situation is unlikely to change unless
agencies alter their behaviour. But in the current market, I don't
see that happening any time soon.
