How The Emergence Of The ‘80/20’ Ad Groups Is Changing The Narrative Of Advertising – Forbes

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The big ad groups are evolving into institutions that cater to fewer, but bigger, accounts. They prioritize pitching the world’s biggest advertisers in order to obtain a bigger portion of their ad spend, and often, all of it. T…….

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Pareto concept

getty

The big ad groups are evolving into institutions that cater to fewer, but bigger, accounts. They prioritize pitching the world’s biggest advertisers in order to obtain a bigger portion of their ad spend, and often, all of it. The latest example is WPP, which last week was awarded the entire ad budget of Coca-Cola. WPP will form a bespoke unit that will handle media, creative, and data in some 200 countries. Coca-Cola’s pre-pandemic spending on advertising was $4.25 billion in 2019, making it one of the world’s top advertisers.

The decision wraps up a ridiculously long 11-month review. The search was managed by accounting firm PriceWaterhouseCoopers, and it involved hundreds of meetings with top-level holding company executives, in what was one of the sought-after agency reviews of the year. Among other big account wins this year were Mercedes-Benz by Omnicom, and Facebook and Walmart media accounts by Publicis Groupe.

Winning mega-accounts with a fee of over $100 million, is a priority for the holding companies and the new management consulting entrants, such as Accenture Interactive. There are perhaps only about 50 such accounts, which makes competition especially fierce.

Mega-accounts are often discounted but they can still be profitable. The ad groups tend to engage in price competition in order to win the big accounts, asking for only a fraction of their regular fee, sometimes with margins in the mid-to-low single digit. I’ve seen instances in which a holding company had agreed to work for a profit margin of 1% or 2%, or even defer making a profit altogether to subsequent years after being hired, and to work for cost upfront. However, the enormous size of these accounts means that, if the agency can negotiate a reasonable scope of work, the business can generate significant cash and profits. And, the thinking is that, overtime, the agencies will increase their income by selling extra services to existing clients. 

Big ad groups are rethinking their model at this time because of the relentless pressure on agencies, particularly from the embattled, “legacy” advertisers. Procurement executives ask for lower pricing and longer payment terms, such as 120 days. In that environment, small-budget clients that demand big-client service are less profitable and less attractive for agencies.

The appeal to clients to source all services “under one roof” is a tempting one, but just might be a tad perilous. In the last decade, media fragmentation resulted in vast expansions of client rosters of specialist agencies, thus, replacing the multi-faceted Agency of Record. Advertisers sought a more efficient way to manage and coordinate all of those agencies and were coaxed by the holding companies to shift all their specialty communications needs, or most of it, to bespoke agencies created by the ad groups.

Winning big-spending clients is critical for the holding companies. The big agency groups have piggybacked such accounts so as to turn local agencies into global networks with scale. And, as the model became more similar to the 80/20 structure of many commercial operations, where 20% of customers account for 80% of revenue, the ad groups would become stronger and more profitable.

However, this strategy comes at a cost. By hiring bespoke units at the holding companies, big clients forgo a commitment to best-of-class services and creativity, in exchange for coordination. No holding company can ever be good at everything, always. If they are good only as media buyers, they may not have top creative agencies or the latest technology. …….

Source: https://www.forbes.com/sites/avidan/2021/11/16/how-the-emergence-of-the-8020-ad-groups-is-changing-the-narrative-of-advertising/

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