The statistics are in: the average ad agency markup earned on an outside purchase is well below 20 percent. Fifteen years ago, it was closer to 30 percent. This has happened for a lot of reasons, including proliferation of cheap online printers, new technologies, and the movement toward fees for agency compensation. Unfortunately, one of the main reasons agencies are losing markups on outside services is that they just don’t do much for the money. Clients are not stupid. When they see agencies earning thousands of dollars for doing very little, they find ways to keep that money for themselves. We have written many times on presenting to clients the justifications for agency markups. Regardless, we just can’t seem to stop the trend toward net purchases.
Then, not long ago, the production manager of a Texas agency took us to school.
“Look,” she said, “the only way the client allows the agency a markup in today’s market is if the agency can deliver the goods. Once each year, I call all of my vendors together in a meeting and tell them in no uncertain terms that to keep our clients’ business, they will have to step up to the plate.” Great words, but what does all that really mean? Here is a list of her requirements for vendors:
Give the agency a volume discount based on total purchases for the year. Her agency then passes some of that discount on to clients on a pro rata basis, i.e. Buying from the agency allows the client to get it cheaper.
Turn over to the agency all rights of ownership in the materials produced for the lowest price that can be negotiated—call it a one-time usage price. The agency then retains ownership, or passes it on to the client, remaining in control of the situation.
Quote a flat price, not a “per thousands” cost, in the case of printers. The production manager insists she is not interested in paying for extra thousands of collateral pieces because the press cannot be shut off at exactly her specified quantity.
Submit any changes in vendor price to her in writing, or she insists she will not pay, regardless of the circumstances.
Provide, for any pre-press work, a vendor-signed statement of responsibility, attesting that the vendor assumes responsibility for the success of the press run as it relates to the executed pre-press work.
You begin to get the point here. This production manager feels the agency plays an important role in the outside services process. She has established a set of rules that her vendors must follow. This invariably leads to successful projects, and causes clients to put their faith in the agency to produce better work at a better price than they could achieve for themselves. In exchange, the client allows the agency to take their markup.
It’s all very simple. If you deliver a service that is worth a fee, then the client will pay you for the service. If the client feels you are simply tacking on a lot of dollars to the net cost of outside purchases, and delivering nothing in return, then of course they will not want to pay the fee or markup.
What’s it going to be in your agency?
Our advice is to lasso your vendors at the beginning of the year and establish some rules. If you do, it may be worth $40,000 or $50,000 to you this year.