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How much of the marketing budget should be allocated to Agency Fees?

From time to time we are approached by our Clients to answer the question – “how much of the marketing budget should we allocate to Agency fees”.  And the short answer, perhaps unhelpfully is “it depends”.  To be fair it is not usually the marketing and communications teams that prompt the question, but their colleagues in Finance or Procurement where it would certainly make life easier if there was a simple answer to the question.

There are many factors that influence the Agency fee as a percentage of budget ratio – but the key considerations are:

  • The scope of work
  • The agency model and roster structure in operation
  • The marketing mix
  • The commercial and marketing objectives of the Brand
  • And variances in accounting / reporting of marketing spend.

What are agency fees?

It’s perhaps useful to start with some definitions of what we mean by the different elements of marketing spend:

  • Agency Fees:
    • The amount charged to the Client for undertaking work on their business – it relates to people engaged on the account / project and is usually measured in time and rates
    • It excludes 3rd party costs
  • Marketing Spend:
    • All external marketing expenditure i.e. monies paid to 3rd parties excluding Agency fees
  • Media Spend
    • The amount of money spent on planning, buying and purchase of paid media space. 

Why the interest in Agency fees?

With the proliferation in marketing communication channels the general trend is Agency fees are increasing as a percent of overall marketing spend, which naturally prompts greater scrutiny.

There are two main reasons for the increased share of spend on Agency fees:

  • Fewer funds are being spent on paid media – we have already seen significant shifts of marketing budgets away from print advertising and TV to some extent to digital media – search, social media, etc. – so the Agency fee as a proportion increases
  • The increasing need for content and the impact of more channels and disciplines is increasing the Agency’s scope of work from the Clients to support them

We have also observed that some management consultants and accountancy firms are advising Clients that there is a correct ratio for working vs. non-working marketing spends. Whilst we believe that some guidelines are helpful and useful they should never be just regimentally applied – this can be just as detrimental to an organisation as useful.

What are the challenges in answering “what is the right level of Agency fees?

Challenge 1 – Accounting / Reporting Marketing Spend

The way Brands account and report their marketing spend differs significantly.

Some or all of the following might be included:

  • Internal marketing salaries – which are a significant cost
  • Customer service costs – particularly significant in an industry sector that has a significant customer contact activity
  • E-commerce activities
  • IT costs relating to their digital platforms (from software, operations and maintenance and content)

Ultimately, this means that what a Brand reports or accounts for in its marketing spend differs significantly.

And this difference will be exacerbated across countries (due to differing labour costs) as well as industry to industry and within industries.

There is some credence that a better measure could be paid media spend as this data is more readily available in the public domain and in some markets audited. The downside is that paid media is generally on the decline, and therefore could be considered ‘old school’.

Challenge 2 – Marketing Approach / Digital

The Go to Market approach of a Brand can have a significant impact on the ratio of Agency fees to marketing spend.

This is mainly due to there being significantly more work involved in BTL and digital communications than ATL.

Therefore if the marketing approach:

  • Is more traditional (i.e. more ATL) the Agency fees will be lower as a proportion
  • Requires a higher engagement with their target audience, or is more contact orientated, the Agency fees will higher
  • The level of digital adoption will also significantly change agency fees. A higher adoption level means higher Agency fees as digital is more time consuming but conversely you will spend less on media

Challenge 3 – Industry / Competition

The industry (or type of business) as well as the competitive situation the Brand faces itself will also impact the ratio of fee to marketing spend.

From an industry perspective this is in part because the industry ‘dictates’ the type of Go to Market approach (FMCG more traditional, etc.) but not exclusively so – consider Apple to Dell or HP.

But also the industry can determine your business model (i.e. a need to be everywhere locally versus very centralised), which in turn can affect the agency model  chosen.

Challenge 4 – Reporting

Most companies or brands will not report any details of their marketing budgets but only overall numbers, and thus it is difficult to establish a like for like marketing spend when you are not sure what is included.

Consultants (like ourselves) rarely, if ever see the whole picture.

In our experience, we have also seen variances in how Brands report in local countries or regions with significant variations in the way spend is allocated and accounted for.  As local country or regional expenditure can be a significant proportion of overall spend this can distort the figures markedly.

Challenge 5: Agency Model

The agency model used will have a big impact on the fees.

In a centralised agency model the fees will generally be a lower proportion of spend than in a decentralised agency model.  However this alone is not a good enough reason to choose one over the other.  The agency model needs to reflect the business and marketing objectives of the company.  Which brings us to the next challenge…

Challenge 6: Company Objectives

The agency fee and / or spend allocation can also be significantly affected by the near term objectives of the company.

For example, if a company is trying to build its digital platforms or sees a market opportunity to invest ‘ahead of the curve’ and makes significant media spend available – both of these could alter the ratio.

How to assess whether the overall Agency fee is appropriate?

A key starting point is to understand the overall marketing Scope of Work and marketing plan for the year.  And then take many or all of the ‘challenges’ identified above into consideration.

Some Companies and Brands fall into the trap of agreeing a Scope of Work and its associated fee at the start of the year.  Then business pressures through the year result in the marketing budget being cut, resulting in a change in planned activity, but the fees and account resource are not reviewed.  This then can become compounded if the overall level of fee resource is carried over into the following year’s plan and becomes the new norm.  So looking at trends in the ratio of fee spend over time is useful.

You should undertake fee benchmarkeing either in-house with the support of the Procurement team, or by using independent consultants.  At The Observatory International we’ve undertaken Scopes of Work and fee benchmarkeing for countless Clients and invariably our costs are more than covered by the variances to norm we identify.

In Summary

There is no forumula, or ideal ratio for Agency fees as a proportion of the overall marketing budget.  Many factors need to be taken into consideration – including the Scope of Work, Agency roster model and the business and marketing objectives.  There is no ‘one size fits all’.

However, it is important and commercially valuable for a Brand to review its Agency fee spend on a regular basis to ensure an appropriate balance of Agency fees to overall spend.

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