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