MARKETING TECHNIQUE: TOP SALES PROMOTION AGENCIES - Remuneration/Paying their own way. Paying for sales promotion by results has become an issue as clients begin to question what they pay for and how they pay for it. Ken Gofton takes a look at how consult

The decision to rank consultancies in this year’s sales promotion league table by gross profit rather than turnover has been welcomed by most, but has caused nervousness amongst a few.

The decision to rank consultancies in this year’s sales promotion

league table by gross profit rather than turnover has been welcomed by

most, but has caused nervousness amongst a few.



’Clients don’t understand,’ ventured one. ’Bullshit,’ responded

another.



What clients want to pay for, and how they want to pay for it, is

changing anyway. Some clients are even talking about payment by results.

So what better time to look at some of the issues, starting with a few

definitions:



- Turnover, the measure we have used in previous tables, is the total

amount invoiced to clients. Where some people quarrel with this as a

tool for ranking agencies is that it can fluctuate without reflecting

what is really happening to the business. For example, a company might

offer pounds 1m worth of cars in a competition. It could be an arbitrary

decision whether the purchase went through the client’s or the agency’s

books. If the latter, it would add pounds 1m to the agency’s turnover,

for no effort.



- Actual income (or revenue) would be the best measure of all. This is

fees, including retainers, plus other income, such as mark-ups, handling

charges and commission. Unfortunately, it is difficult to get verified

figures for revenue, as it doesn’t appear under that name in the

accounts. Which is why most are happy to accept the nearest alternative,

which is...



- Gross profit. This is defined as turnover less cost of sales. There

are a few accounting niceties which mean it isn’t exactly the same as

revenue, but it is generally considered near enough, and a good

indication of how well an agency is doing.



Gross profit, of course, is not the same as pre-tax profits; a lot of

overheads and other charges have to be knocked off the former before you

get to the latter.



One interesting point, however: there should be a reasonable correlation

between gross profit and staffing levels. The average works out at about

pounds 55,000 of gross profit per employee, and the majority fall within

pounds 10,000 either side of that.



Fast-growing Logistix is a major exception, but then the company, which

specialises in big, pan-European promotions to children, has tended to

have a much higher turnover per head of staff, too.



What about changes in the way clients buy from SP agencies? One trend

which has been seen in other marketing services, too, such as direct

marketing and design, is that client companies are much more likely

these days to use their purchasing departments to buy print, premiums

and other items.



This reduces the opportunities for agencies to make their money from

mark-ups, and makes them more dependent on fees.



’Our policy is to offer best value, which is not necessarily the same as

cheapest price, whereas purchasing departments often look at price

only,’ says Gary McCall, divisional director at Poulter, in Leeds.



’But we have to be realistic; this trend will continue. Agencies have to

look at the ways they are remunerated and, importantly, how they can

continue to stay in control of projects when clients are involved in the

purchasing process.



’They will need to work closely with clients’ purchasing departments to

guarantee the finished product meets the quality that everyone in the

promotion process requires.’



They must also ’develop terms of business that clearly reimburse

agencies for their involvement in the development of sales promotion

campaigns.’



It does seem, in fact, that sales promotion consultancies are having a

little difficulty adjusting to how they make their money in a changed

environment. It is reminiscent of the adjustments design consultancies

had to make with the spread of computers. Up to that point, they had

made a lot of their profits from charging for new artwork whenever

clients changed their minds about anything. With the advent of the

AppleMac, however, design changes could be accomplished with a few key

strokes.



The dilemma for the sales promotion agencies is that they may have set

their fees too low in the past, expecting to improve their overall

profitability through mark-up or commission on goods and services bought

for the client.



It is this type of work which increasingly is being handled by clients’

own purchasing departments.



And even where it isn’t, consultancies can have problems convincing

naive clients that they have to be remunerated for the work involved in

handling purchases.



At a loss over profit



One consultancy told me of a junior client who was adamant that it

should make no profit on a particular piece of work, until it was

forcibly pointed out that agencies are in business to make a profit,

just the same as client companies. Some consultancies have made a point

of moving to totally transparent invoicing in the past few years, which

is surely a better approach.



Commenting on this trend, The Marketing Store’s chairman, Graham Kemp,

says that his agency has conducted a survey which shows that there is

still anxiety among clients about how agencies earn their money.



A long-term relationship with a client gives a consultancy in-depth

understanding of the business. But the downside, according to Carlson

president Robert Janes, is that it becomes difficult to persuade those

clients to raise their fees sufficiently.



Logistix echoes these two points, noting that clients are seeking

longer-term relationships, replacing (mark-up) margin with fee-based

reward.



The problem, it claims, is how you properly evaluate the ’added value’

which the agency contributes.Kemp disagrees; he thinks the benefit is

much more apparent in a fee-based relationship.



Yet another twist to the argument comes from Cramm Francis Woolf.

Clients, says chairman Brian Francis, are becoming tougher and want

better value for money.



’There was a time when clients were prepared to pay high charges for a

large amount of administration, as well as for the ideas generated by

the agencies. Nowadays we think that agencies are used primarily for

strategic consultancy, and for great and relevant promotional ideas.



’Clients demand very slick administration and production, and are

looking for better value for money in this area.’



The clients’ unwillingness to pay over the odds for administration will

have an impact on the way agencies are run, Francis argues. ’The good

people who can convert briefs into fantastic, creative schemes will do

better.’



The bonus issue



Finally, there is a lot of discussion within the SP sector about clients

asking to pay according to results.



Susie Vivian, managing director at LGM, says she has encountered it from

new clients, but often on the basis that this is how they deal with

suppliers in other areas. ’The fact that they might pay a printer a

bonus for delivering early isn’t really comparable with a creative

service,’ she says. ’And I would be more confident if clients produced

better briefs with clear objectives.’



Iain Ferguson, chairman of KLP Marketing, is more enthusiastic about

this method. ’We see it as an income opportunity. If we are doing

exceptional work with exceptional results, then we should be able to

look for a bonus,’ he says. ’The good clients have no problem with that,

because they want a method of motivating exceptional efforts from their

agency.’



Some of IMP’s clients take a similar line. The agency’s chief executive,

John Quarrey, says: ’With many campaigns, the results can be easily

measured.



The way we control that kind of deal is that it allows us to make a

profit, but with an incentive to deliver peak performance.’



And there are solutions, even where campaigns cannot be readily

measured.



At Claydon Heeley, in the case of three clients, 10% to 15% of the fee

is discretionary.



’If they think we are doing a good job, we get the money,’ explains Jon

Claydon. ’If not, we don’t. It is a great discipline. The benefit to me

as a manager is that it focuses the team’s mind wonderfully, across a

wide range of their activities.’



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