Cheap isn’t always good

Media agency reviews I come across have one universal requirement: that the successful agency is able to buy like-for-like media at a lower cost than their current agency. Aside from the obvious question of how low media costs can get, I believe that this is one of the least valuable ways to pick an agency. Instead, I believe the discussion ought to start with how a new agency can improve advertising effectiveness to drive sustainable business growth.

Let’s take the case of an average advertiser consolidating their annual US$50 million media budget across South East Asian markets. The winning agency promises 10 percent cost-savings on the client’s existing media buy. This then equates to savings of $5 million which might be immediately returned as cash in the bank, used to fund additional initiatives (e.g. content creation), more media buys or most typically a blend of the three. Regardless, at some point they’ll be able to make the comparison and see that the cost per GRP this year vs last (accounting for media inflation of course) is lower than it used to be and they’ll be the equivalent of an extra $5 million better off. That sounds really good, but ought this to be the major driver in agency selection?

Here’s why it doesn’t matter as much as it seems to:

1. Inflated savings

While the winning agency might have offered 10 percent in savings, you can bet your house that the runner-up was offering 8 percent. In which case the like-for-like saving for our average advertiser is probably closer to $1 million. This is a lot of money, obviously, but it feels slightly less compelling.

2. Increased profits

Now, let’s look at the other end of our client’s business: advertising returns. Depending on whose benchmarks we use, advertising profit ROI comes in, on average, at about 1.4. This means that for every dollar spent, businesses will on average generate $1.40 in profit. Our average client can therefore expect to generate about $70 million in profit from their media investment.

Let’s suppose our average client puts in place an analytical framework to evaluate the effects of their past marketing investments and then uses the output to optimise future media deployment, maximising business returns. Do more of what’s worked, less of what hasn’t. Experience shows that driving 20 percent incremental ROI is easily achievable within a market. Across multiple markets improvements of 40 percent and above are seen frequently.

What does this mean? It means that with a bit of data, the right analytics partner and a trusted media agency to action the output, our advertiser could increase company profits by between $14 million and $28 million annually. This feels like a much better number than $1 million.

3. Strategy informed by solid business analytics drives real business growth

In a bid to remain competitively priced, the analytical services that fuel the process of measurement, understanding and optimisation, are listed separately from the core media proposal and are therefore deemed optional during negotiations. The analytical framework then gets bucketed as an added expense on a costing sheet and removed from the table. And this in turn has knock-on effects for the best-practice strategic processes that aim to deliver incremental business value.

Good business analytics are not simply an added expense. They provide a very real opportunity to facilitate sustainable business growth. The returns I mentioned above relate to advertising and driving only one aspect of the strategic processes around media planning and buying. But the same analyses deliver insight across a vast array of high value areas, from distribution to pricing, streamlining the consumer path to purchase, informing creative, content right through to determining whether or not a business actually needs a 24/7 Twitter team.

So yes, buying media cheaper than ever before brings with it very valuable hard cash savings. However I believe that the discussion ought to be focused far more around “how is my agency going to deliver smart, tangible and demonstrable business growth?” and I long for the day when that is the universal requirement of all media agency pitches.

John Perella is managing partner of Data2Decisions Asia-Pacific.