Don Draper wouldn’t throw back so many cocktails in today’s advertising world.
The lead character of the AMC television series “Mad Men” lived in a bygone era of advertising, where agencies thrived off 15 percent commissions from multi-million-dollar advertising accounts.
Today’s advertising market isn’t so lucrative. Or simple.
Commissions have yielded to fee-based pricing models, where agencies are paid for the work they put in. Straightforward mass advertising campaigns have given way to complex marketing strategies, incorporating targeted audiences, branding, public relations and multiple media that span television, events, newspapers, social networking, direct mailings and search engines.
“The money and the profit in the ad agency world used to be staggering,” said Bill Field, president of Mintz & Hoke Communications Group in Avon. “It has just completely changed from what it was.”
The 15-year movement away from the exclusive commission-based pricing model accelerated during the past two years with the economic downturn, as companies slashed their advertising and marketing budgets. The American Express OPEN Small Business Monitor shows 39 percent of companies nationwide eliminated their marketing budgets in 2009.
The revenues at First Experience Communications in Glastonbury dropped considerably over the past two years, forcing CEO Ira Yellen to reduce his staff to six from its high of 12. Corporate business once made up 90 percent of his client list; now the majority is non-profits and educational and health care institutions.
“Companies just aren’t spending the money,” Yellen said. “This all filters down, too. The printers are hurting terribly.”
As ad agencies fight for the shrinking marketing dollar, clients shop around for more options. If one agency isn’t willing to offer a fee-based model, another agency will, said Lynn Taylor, principal at Keiler & Co. in Farmington.
With limited advertising budgets, companies pay closer attention to their spending, looking for greater return on investment. This leads to more targeted marketing approaches, as companies only want to spend dollars that will reach their likely customers.
After a company — with the help of its ad agency — carefully researches its target audience and the best way to target that audience, the company can choose from a variety of media to display its advertisements. New methods made popular by the Internet — such as social networking, search engine display ads and online branding — are replacing traditional newspaper, magazine and television advertisements.
As the industry moves away from the traditional methods, the commission is replaced by non-traditional methods of payments such as fees and production mark-ups, said John Cordone, principal at The BCB Group in Wallingford.
“We don’t do a lot of network television advertising,” Cordone said.
Because fees tend to be based on an hourly rate, the amount of money an agency earns is closer to the amount of work actually put in, Taylor said, as opposed to the old days of taking a straight 15-percent commission off a $50 million account.
Commissions have dropped, too. As media costs became more negotiable, the once standard 15 percent has dropped to 3 or 4 percent, Taylor said.
As a result, straight-commission deals are increasingly rare. Advertising contracts between companies and agencies are more hybrid, combining commissions, fees and other payment methods. Because reach marketing strategy is different for every company — each with its own budget and approach to advertising — the mix of payment methods is customized from client to client, instead of the one-size-fits-all pricing model.
Even with the industry changing, Cashman & Katz in Glastonbury had its best year for revenues in 2008. Its $40 million in capitalized billings for 2009 was on par with that record year. With three months to go in 2010, revenues are coming in 10 percent above 20008, with the possibility for another record year.
Officials at Cashman & Katz say the agency thrived during the economic recession because it offers a full range of resources, including research, public relations, traditional and digital advertising, and design work.
“Because we offer so many services, we can bundle our services and the compensation model for those services, therefore making it more efficient for the clients, not only from a cost-effective standpoint but also in the delivery of its marketing,” said Tony Cashman, president of Cashman & Katz.
Cashman said more clients focus on events marketing, too, which they feel is a solid, grassroots method of connecting with clients on a person-to-person level. Headlining an event also establishes a company as an industry and community leader.
Because clients are looking for a greater return on investment from their advertising dollars, agencies are embracing the idea of a performance-based payment model. Under this model, ad agencies receive incentives when marketing campaigns hit certain metrics levels. This model requires more careful planning so the metrics goals are on par with the incentive basis for what was expected out of the campaign.
“The economy has shined a greater light onto what companies are paying and what agencies are charging,” Field said. “(The performance-based) model allows you to get paid for work that works.”
