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How The Emergence Of The “80/20” Ad Groups Is Changing The Narrative Of Advertising

By News Creatives Authors , in Leadership , at November 16, 2021

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. Perhaps because the bespoke agencies focus is on coordination, it is a rarity to see them inspire creativity.

To create those bespoke units, the ad groups will often pull people out of the legacy agencies, thereby weakening them, and furthermore, by positioning the bespoke agencies as state-of-the-art elite agencies, the implication is that, the legacy agencies themselves are second-rate. The result, often, is diluting the talent pool at the ad groups.

The 80/20 transformation of the big ad groups means that mid-size advertisers will start evaluating the attractiveness of partnering with big agencies. It is well-known that big agencies service their big accounts at the expense of smaller clients. That is reflected in resource allocation decisions, both in quantity and quality, which skews disproportionally in favor of big clients.

My experience as pitch consultant is that the ideal agency for a mid-size advertiser has between 10-20 retainer clients. If the agency has less than 10 clients, or if more than 30% of the agency’s business is from a single client, the agency’s future may be too risky: If the big client fires them, they may not stay in business. 

I also recommend against hiring an agency with more than 20 clients. This type of agency usually has many small-budget clients demanding excessive big-budget attention from the agency. This leads to service dilution. Stay away from agencies that have many small clients producing less than 3-4% of its revenue.

Knowing where the potential agency rates, at the present, during the pitch, is not enough. You have to understand their future potential. This involves understanding their approach to both hiring and to retention, in order to ensure that you’d continue to get access to the best talent. It is also essential to understand just how their client roster is likely to evolve in the future. Creative talent is attracted to certain clients more so than others, therefore, understanding their business aspirations is also important. You would likely want to know what their business development plan is. And, you’d definitely would want to understand their approach to investing in technology, especially data technology, and just how they are evolving their business to align with the digital transformation.

The evolving 80/20 transformation is likely to return to the ad groups at least some of the profitability that they had surrendered over in recent years. They would benefit from an attrition of small-budget clients that are marginally profitable. At the same time, many of these small-budget will most certainly migrate to mid-size agencies, being that, the advertising industry is remaking itself along a tiered approach.

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