October

92011

3P TRACK

2

“Advertisers and their agencies are facing an increasing challenge, which…often creates friction, inefficiency and waste in client/agency relationships as traditional players on either side, or both, apply traditional practices (or expect traditional outcomes) without an understanding of very different Digital norms and economics.”

Client Perspective

May not understand requirements to deliver digital marketing programs

Simplify and standardize processes for managing agencies:

Same compensation framework

Same metrics (effective commission rate, blended hourly rate, etc).

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Digital Reality

More labor-intensive

Different set of skills

Demand > Supply for certain talent

Historical relationship between cost of “creative” “production” and “media” no longer relevant

4

Digital Reality

The right agency model to deliver value

Getting compensated

Maximizing profitability

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Agency Model

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Digital Agency Service Model

Brand Strategy

Creative ProductionMedia

Strategy and Planning

Media Buying

Multiple Channels:Website, SEM, SEO, Video, Social, Email, Mobile, etc.

Build/Partner/Outsource?

Specialist/Integrated?

7

Digital Agency Service Model

“One of the smartest things we did was build an in-house production capability.

Having said that, I don’t know if we would do it today.”

President, Leading Digital Agency

8

Brand Strategy

Creative ProductionMedia

Strategy and Planning

Media Buying

CommoditizationInvestment required given expanding range of options

Digital Agency Service Model

Production

Quality ControlUnderstand Client’s Technical Infrastructure

9

Brand Strategy

CreativeMedia

Strategy and Planning

Media Buying

Digital Agency Service Model

Brand Strategy

ProductionMedia

Strategy and Planning

10

Media BuyingCreative

Digital Agency Service Model

Production

Operating MarginsIn-house: 19.2%Outsource: 16.5%

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Brand Strategy

CreativeMedia

Strategy and Planning

Media Buying

Digital Agency Service Model

Media Buying

Operating MarginsIn-house: 18.5%Outsource: 18.0%

12

Brand Strategy

Creative ProductionMedia

Strategy and Planning

“Hearst Buys iCrossing For $325 Million”

“The Newest Ad Agencies: Major Media Companies. Marketers Increasingly Bypass Traditional Business Model”

“Google, Omnicom Partnership

Redefines Digital Advertising”

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Clients

Strategy and

CreativeProduction

Media

Planning

and Buying

Ad Exchanges

Media

Companies

Search Engines

"If I were an agency, I would be really worried

about being disintermediated. More and more, agencies are

almost in the way sometimes.“

Becky Saeger, CMO Charles Schwab

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Ad Networks

Clients

Strategy and

CreativeProduction

Media

Planning

and Buying

Ad Exchanges

Media

Companies

Search Engines

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Ad Networks

So, What’s the Right Agency Model?

Client RequirementsMedia ConsolidationProduction Volume

Agency Core CompetenciesCulture

Ability to DifferentiateQualityPrice

$$$Growth vs. Margin

Erosion

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Compensation

17

of Marketers utilize

retainer/project fee

combination

Increasing use of performance

incentives

18

Compensation

Educate/Define SOW

Budget

Presentation

Utilize Performance Metrics to

Demonstrate Value

19

Output-Based SOW

Traditional

Create development and production of one :30 TV SpotOne full-page, four-color print ad

Digital

Website Enhancements: Strategy, Architecture, Wireframes20 Landing Page Designs & Code Executions

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Scope of Work

Phase Detail

Program Objectives Drive trial of new

product through qualified traffic from key words

to landing pages.

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

22

Scope of Work

Phase Detail

Program Objectives CPC/PPCImpressionsCTRQuality ScoreCampaignAd GroupConversion

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

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Scope of Work

Phase Detail

Program Objectives Develop 4 Landing PagesDevelop Messaging and Online AdsDetermine Search TermsAllocate Media BudgetOptimize

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

Develop 4 Landing Pages

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Scope of Work

Phase Detail

Program Objectives

Develop 4 Landing Pages:

Discovery…Design…Development…Deployment…

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

25

Scope of Work

Phase Detail

Program ObjectivesDevelop 4 Landing

Pages:Project ManagementDigital PlanningCopywriterUX DesignDevelopment

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

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Scope of Work

Phase Detail

Program Objectives

Define Key Terms

Project Detail

Agency Resources

Time Line

Budget Proposal

27

Budget/Proposal

TV Campaign

Agency Fee $150,000

Production $100,000

Media $1,000,000

Total Budget $1,350,000

Agency Fee % of Media

15%

“Marketer perceptions are that digital agencies are more expensive,

when in fact, the expense is simply related to outdated perceptions about agency fees as a percent of media and/or production spend.”

David Beals

Digital Campaign$250,000

$0

$1,000,000

$1,250,000

25%

Category Budget

Creative/Production $250,000

Media $1,000,000

Total Budget $1,250,000

Budget/Proposal

Metrics Targeted Actual

Impressions XX XX

Clicks XX XX

CPC XX XX

CTR XX XX

CPM XX XX

Conversions, etc.

XX XX

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Managing Profitability

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Attendee Survey

% of Revenue

Revenue (Gross Profit)

Personnel Expense 57.1%

General & Admin Expense 24.3%

Operating Profit 18.6%

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Profitability Model

% of Revenue

Revenue (Gross Profit)

Personnel Expense 57.1%

General & Admin Expense 24.3%

Operating Profit 18.6%Employee utilization >

80%

Profitability by client/service

Adjust for owner’s distribution

Client / Agency Labor Mix70% / 30%

Full-time / Freelance Staff:Recurring / Project Revenue

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Profitability Model

% of Revenue

Revenue (Gross Profit)

Personnel Expense 57.1%

General & Admin Expense

24.3%

Operating Profit 18.6%

Rent: 8% RevenueRSF Per Employee $175

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Agency Example

As Reported Adjusted

Revenue (Gross Profit)

Personnel Expense 59.0% 65.0%

General & Admin Expense

28.0% 28.0%

Operating Profit 13.0% 7.0%

Client/Agency Labor Mix: 54%/46%

Billing rates do not cover overhead

Subpar profitability on key digital services

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Agency Example

Website Development

OriginalRenegotiate Dev.

Fees

Copy In-

HouseRevised

Monthly Reportin

g

Minimum

Profitability

Agency Fee less external costs

7,500(4,000) 1,000 1,200

7,500(1,800)

3,900(1,140)

11,400(2,940)

Agency Gross Profit

3,500 1,000 1,200 5,700 2,760 8,460

Internal Costs (5,238) (1,080) (6,318) (2,052) (8,370)

Operating Profit

(1,738) 1,000 120 (618) 708 90

Operating Margin

-50% -11% 26% 1%

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Educate/Define SOW

Budget

Presentation

Utilize Performance Metrics to

Demonstrate Value

% of Revenue

Revenue (Gross Profit)

Personnel Expense 57.1%

General & Admin Expense 24.3%

Operating Profit 18.6%