Operating Costs Are Rising – Should Agencies Absorb the Increase or Increase Fees?

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Each week, The Drum asks experts from agencies around the world and the advertising industry for their perspective on a difficult issue facing the industry, from topical concerns to recurring issues.

Operating costs are rising for businesses across the board, but agencies aren’t just dealing with inflation around supply costs or rising energy bills – they’re also dealing with charges. higher salaries. What to do ?

Some agencies tell us that they will increase their clients’ fees, but others have indicated that they plan to absorb at least most of these increases (and a few tell me that they plan to reduce the prices of these rivals). So, in the face of rising costs and shrinking margins, how does your agency decide what to do next?

How do you solve a problem like… deciding if (and when) to absorb higher costs?

Shenda Loughnane, Global Managing Director, iProspect Global

Rising costs are likely to become an economic reality for the foreseeable future for all parties. But while it may be necessary to raise prices, that’s not always the only answer.

The best approach is to have an open conversation with customers about rising costs and explore potential solutions. This may mean examining how we outsource or outsource certain roles or activities to help balance the inflationary impact, or investing more in automation – again with the aim of maximizing efficiency.

Ultimately, it’s about working together to find the optimal solution, which meets both the individual needs of the client and those of the agency.

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Annabel Mackie, Managing Director, Five by Five

As an independent agency, we are uniquely positioned to control our own destiny. We are not weighed down by group fees and are nimble in how we support our clients, ensuring the most effective and efficient team structures. This, coupled with our proprietary production management tool – which allows us to deliver volume at pace (for example, for Activision we deliver over 8,000 assets to 25 markets in 28 languages ​​in 10 working days) – means that we can keep our customers’ costs competitive.

We recognize that our customers face the same challenges and we partner with them by using our creative and technological expertise to solve problems together. For us, it’s less about passing on rising costs to our customers, and more about partnering with them to find more efficient and effective ways to deliver for them, which is a win for both parties.

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Anton Jerges, Managing Director, Collider

Coming out of the pandemic, we made the costly decision to only hire senior executives to create a team that can win work, build strong client relationships and serve complex campaigns at an exceptionally high level. . To offset the cost of talent, we reduced fixed overheads: rent, subscriptions, back office… This built flexibility around staff compensation.

Are we going to raise our prices? Yes. Will this have a negative effect on customer relations? No. If you invest in the right people, you build strong relationships with your customers, which means you don’t have to worry about price competition because customers will appreciate what you do.

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Gilbert Corrales, Managing Director, Leaf

Raising prices in an oversupplied market during an operating expense crisis is risky. Cost management is the only thing a business can truly control.

Having a fully remote work model and investing in proprietary automation and technology are key strategies that have enabled us to achieve critical operational efficiencies and improve client LTV through trust and results.

The global remote working and construction technology at the heart of our service allows for much higher margins and provides us with trading flexibility and stability during times of inflation. We can remain competitive on price while achieving good margins.

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Chris Mele, Managing Director, Siberia

I’m afraid there is no easy solution. A healthy P&L is about balancing competing priorities. Clients’ readily available labor and the demand for a salary increase go hand in hand.

Any agency primer will tell you that we are no longer living in the Covid halo wage demand boom that we have experienced for the past two years. The labor market has eased. For better or worse, so has the influx of customers with urgent cases and minimal price sensitivity.

Do the dance. Set priorities, stay disciplined on costs, treat new leads carefully and, above all, take care of your current customers.

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Dan Rawley, Marketing Manager, Evoluted

At Evoluted, we have decided to absorb rising costs for the foreseeable future. During the pandemic, we’ve helped our customers with billing freezes or payment plans – similarly, we now recognize that they too are facing cutbacks on everything from wages to manufacturing costs.

Also, until we know how long the crisis will last or the government’s response, raising our prices now could damage reputation in the long run.

We have paid all staff an annual cost of living allowance of £2,000. The coming months will be difficult for everyone, which is why this amount is not prorated and has been extended to employees on long sick leave and maternity leave.

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Scott Harkey, Co-Founder and Managing Director, OH Partners

The most important thing is to make sure that the key people in your agency are well compensated according to your market and employment. Do these checks. We buy less into agencies and more into strategic talent because losing good people to insufficient pay is the worst.

For us, we increased the rates to compensate. Not for existing clients, but based on new projects that require the highest strategic work. Our rates are meticulously broken down by function, title and project scope, so when you enter a new partnership, there are no unanswered questions.

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Anthony Santiago, Managing Director, Pink Sparrow

It’s inevitable that some cost increases won’t be passed on to customers, but we’ve looked inward to help make up the difference and ensure customers get the best value possible. We have developed strategies focused on the composition of our internal processes and working closely with clients to gain optimal project visibility to ensure proper planning and efficient construction timelines.

These strategies, coupled with calculated investments in new technologies such as large-format 3D printers, result in efficient and effective systems that offer cost-effective solutions.

We believe creativity and innovation should never be sacrificed in the pursuit of affordability. We are always up for a challenge.

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Emilio de Haan, Founder and Executive Creative Director, Herc

We try to work smarter during our production process. And we make sure to communicate transparently with our customers. For example, if our client wants to have a certain level of production, it will cost something. However, if their budget does not match their desires, we find new solutions.

Every unrealizable situation creates new possibilities. So instead of working with the big names, we try to find new talent. In doing so, we create paid opportunities for them to operate their portfolio at our level. A win-win situation.

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