DIRECT MARKETING: DM'S BROAD CHURCH

As DM has become a catch-all phrase, Ken Gofton seeks to investigate the means by which different agencies continue to generate revenue.

marketing steadily expanded through the 90s and into the present decade, other segments of the marketing communications game looked on incredulously.

At first they didn't believe the figures. Then, when it became apparent that DM really was growing year after year - and at times it has been the only sector to increase its share of client spend - the disbelief turned to wonder. How were those data-heads doing it? And more to the point, how much money were they making?

It's true that agencies in an expanding market face less price-cutting pressure from competitors than those in a declining one. But even direct marketing is feeling the squeeze in the present climate.

"There are no golden geese at the moment," Nigel Howlett, the vice-president of OgilvyOne Consulting, declares.

That's borne out by recent figures. Not all agencies reveal their profits, but of the top 30, two-thirds have already released estimates of their 2001 pre-tax profits.

The average, as a percentage of gross profit (income), was 15.2 per cent.

A quarter made less than 10 per cent, and one made a substantial loss.

WWAV Rapp Collins London, one of the giants of the industry, has announced pre-tax profits of £5.8 million (19.6 per cent) on last year's income of £29.8 million, which is better than the sector norm.

But its chairman, Chris Gordon, insists he "knows of no evidence that DM agencies are more profitable than ad agencies, if they're both being run well".

What is powering the growth of direct marketing, alongside the changing nature of client needs, has been the expansion in the range of services on offer.

"It's not just a broad church in terms of the arsenal of weapons at its disposal," Howlett says. "It's a broad church in terms of what it can achieve for the client, from customer acquisition and sales to relationship management and brand building."

Direct mail volume has more than doubled since 1990, and remains at the industry's core. But the 90s saw a rapid increase in the use of press, TV and radio for direct-response advertising. Coupons and telephone numbers flowered everywhere.

Ad agencies may have held on to a lot of the TV work, particularly where brand building outweighs response considerations. Even so, WWAV has an in-house production department that so far this year has made 28 TV commercials and re-edited a further 22.

Direct marketing also has a wide cultural diversity. That's not so much to do with the entrepreneurship of classic DM shops, as the migration of sales promotion agencies into the sector because of the decline of their own traditional marketplace. Prime examples include Tequila, Carlson and Claydon Heeley Jones Mason.

Throw in some operations that were set up from the start as integrated agencies, from Interfocus to the more recent arrivals such as Archibald Ingall Stretton and 23red, and the range of above- and below-the-line services available under the DM banner extends considerably.

Then we've had the internet explosion, and, at much the same time, a huge investment by many clients in customer relationship management technology.

Both have provided important growth opportunities for DM agencies, which know about generating response and collecting and manipulating data.

Which is not to say that it has all gone smoothly, and without mistakes.

For instance, Young & Rubicam's DM network, Wunderman, relaunched itself as Impiric, a management consultancy specialising in CRM.

It was suicidal. As soon as the group was acquired by WPP, the name change was reversed. In London, the creative shop HPT Brand Response, headed by Steve Harrison and Martin Troughton, was brought in to stop the rot and the agency was rebranded Harrison Troughton Wunderman.

Troughton says: "They forgot why clients appointed them and why clients come through the door. Our merger signalled the demise of that route. There is clarity now in what we offer, which is creativity rooted in a deep understanding of the clients' business."

In the interactive arena, major agencies such as OgilvyOne, Proximity and ehs:realtime (now EHS Brann) rushed in to establish market-leading positions and later had to make painful cuts.

Dave Poole, the chairman of DP&A and of the Direct Marketing Association's agency council, reckons that most DM agencies retain the canniness of small- to medium-sized enterprises and delayed entering the interactive arena until it was clear where there was money to be made.

But it is unlikely the bigger groups regret their pioneering role.

"Interactive is a big chunk of the business and definitely growing again," Mike Horne, the managing director at EHS Brann, says. "It is right at the heart of the agency. We have four interactive planners, and they sit in the planning department. The creative department works both on- and off line."

One of Howlett's favourite expressions is that online has become mainline.

As just one example, he points out that since the agency established an e-mail centre of excellence, it has been "a hugely fast- growing area for us".

"There isn't a single client who doesn't use it," he adds.

The interactive market has evolved. Earlier cutbacks happened because once highly profitable areas such as website construction have become commoditised. There's better money to be made now from strategic consultancy on e-commerce issues, or from creating interactive marketing programmes that deliver.

This reflects the general situation in direct marketing. According to one agency head, client companies' professional procurement departments are now involved in 75 per cent of negotiations, including both pitches and review meetings.

Professional buyers accept that strategic advice merits a higher reward than routine delivery. And they've either taken print and paper purchasing in-house, or have turned the screw on the mark-up agencies were allowing themselves.

There is a squeeze, and it has led to price-cutting in some quarters.

But as Gordon puts it: "I don't think clients want to see agency margins cut per se. They're under pressure themselves. They want us to be smarter, faster and cheaper. That means we either accept lower margins or work out how to be more efficient."

WHAT IS A DIRECT MARKETING AGENCY?

According to the Direct Marketing Association, a DM agency's main business is to work with clients to generate response, customer contact or sales through direct communications.

"Working through all appropriate media, a DM agency will plan, create, implement and evaluate campaigns, both in the short or long term," its definition continues.

Obligatory services include strategy, planning, targeting and analysis, creative, production management, creative evaluation and multifunctional account handling.

Meanwhile, Matthew Hooper, the chairman of the Marketing Communication Consultants Association (MCCA), says: "We work in an integrated industry that respects the value of the various disciplines, but recognises that none of the modern practitioners is limited to one."

WHERE THEY MAKE THEIR MONEY

AGENCY Strategic Traditional DRTV/ Interactive

consultancy DM* radio %

% % %

WWAV Rapp Collins London 15 45 20 15

OgilvyOne 25 49 2 22

EHS Brann 5 66 7 19

Proximity London 15 40 5 15

Tequila London - 30 - 15

Harrison Troughton Wunderman 10 40 10 10

Interfocus Network 5 30 5 5

DP&A 10 60 15 15

Archibald Ingall Stretton 15 30 10 5

Leonardo 8 22 1 30

AGENCY Brand Design Sales Events/

advertising (non-DM) promotion sponsorship

% % %** %

WWAV Rapp Collins London - 3 2 -

OgilvyOne 2 - - -

EHS Brann - 3 - -

Proximity London 5 5 10 5

Tequila London 10 - 35 10

Harrison Troughton Wunderman 20 5 5 -

Interfocus Network 25 10 5 10

DP&A - - - -

Archibald Ingall Stretton 40 - - -

Leonardo 30 - 8 1

(% contribution of various services to agency income)

* Traditional DM = direct mail, inserts, off-the-page advertising;

** Sales promotion = SP not included under DM Source: agency estimates.

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