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M&M’s Blog goes behind the headlines to offer a running commentary on the business dynamics within the international media and marketing industry. The M&M editorial team joins forces with industry experts and local market heroes to balance a bird’s eye view of global trends with the importance of local insight.

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  • So, what’s wrong with a bonus culture in agencies?

    13 December 2011

    How incentive is the lifeblood of success, especially in the marketing business.

    There has been a jolly great hoo-har over the bonuses paid to bankers this year. Whatever we think about bankers, I think making bonuses the felon is wrong.

    Anything that requires performance, or indeed anything that requires out-performing the market, should be incentivized by a bonus of some form.

    Bonuses themselves are not wrong, but perhaps they have been misused by some companies to reward short term gain when really they are a long-term incentive. We work in an industry which relies on out-performance, everything is geared to be “more efficient, more effective, better ROI, deliver incremental improvements etc”

    Whether you are a marketing client or an agency we are all working to the same principle of marketing success, which is that your brand’s investments need to be ‘disproportionately more effective than anyone else in the category’.

    In lay terms, make every dollar work harder than your competitor and you’ll come out on top, all other things being equal. If you can make your communications more effective than the competition, you’ll spend significantly less on it over time allowing you to invest more in service, product or pricing (which build a reputation in a different, arguably more sustainable way).

    I believe that should be the yardstick by which we define a marketing success. You can of course define ‘effective’ however you want but there’s no escaping the reality that effective marketing should usually be adjudged upon the growth of the company doing that investing (whether that growth be for short term, immediate sales uplift for longer term, brand value).

    Every brand should aspire to spend less on branding / media / advertising (whatever you want to call it these days). That’s not procurement talk, that’s a truth. By so doing, a business can gain an advantage against their competitor who may be wasting their money against less effective means.

    The best piece of business advice anyone ever told me was “to succeed you don’t need to be brilliant, you just need to be better than the next guy”. In order to achieve this you need to consider how to incentivize your marketing service suppliers to help you “be better than the next guy”. For companies (like agencies) that are managing your money with a responsibility to add value to it (making it worth more) then a bonus culture is entirely appropriate. I would argue it is critical to gain this competitive advantage.

    Can we avoid bonuses? Nope. Because the alternative is to just pay a regular income irrespective of performance and that really makes no sense for a company that has a long-term ambition for growth.

    The reason regular people earn a monthly salary is because we need them to turn up in the short term, regularly every month. The reason we give some people the prospect of bonuses is to incentivise them to deliver performance over the longer term, not just turn up. This makes complete sense.

    Unfortunately it has become easy and fashionable to bash bonuses as a principle, especially as people saw bankers who had destroyed their companies being handsomely rewarded for failure. Of course this is wrong. The critical distinction is that bonuses should be directly linked to out-performance of the market over time, so for a media agency that means making media investment work harder than anyone else to deliver the equivalent core KPIs of a client. That takes hard work and some skilled thinking, but should be handsomely rewarded if successful. 

    Many agency contracts include performance bonuses, I think these should be ‘out-performance’ bonuses, call it the “better than the next guy” clause and put a big number beside it. Because if everyone is performing the same then there’s no advantage to investing in marketing and we’ll soon find our client companies find something more productive to do with that money than marketing.

    Tom Denford, founding partner, ID Comms

    Comments (0) | Permalink

    Posted by: Tom Denford

    Tags: Agency Developments, Remuneration

  • Netflix: proof that the consumer is boss after all?

    13 December 2011

    Netflix 

    Back in July, I wrote a post that questioned Netflix’s decision to increase prices, “Is Netflix courting disaster with its latest price hike?” As I have noted elsewhere, sometimes it is worth losing price sensitive customers in order to boost margins.

    However, I would have expected the company to research its pricing decision ahead of time, rather than relying on feedback from irate customers and closed accounts. And if it had carried out the research, maybe its share price would look a lot better than it does now.

    Back in July, Netflix introduced a new pricing plan: $7.99 a month for Netflix Instant Streaming, $7.99 to receive discs in the mail but $15.98 for the combo. The latter price represented a 60% hike over the previous fee of $9.99.

    Customers weren’t happy with the surprise price hike, and Netflix responded publicly by positioning the pricing move as a mistake. But in an email apologising for having “messed up” by announcing the new price scheme, Netflix chief executive Reed Hastings, added fuel to the fire and promptly compounded the mess. His e-mail introduced to users that Netflix was to be split in two. The DVD service was to be rebadged as Qwikster and separated from the streaming service.

    If the pricing announcement was a big mistake, then this one was a monster.

    How on earth anyone believed that the announcement that Netflix was to split into two separate services would be well received, I have no idea. Instead of one account, they were asking you to manage two and pay for the privilege? Get real!

    Qwickster proved quick to stir customer’s anger. After angry complaints and an epidemic of defections, Netflix announced that Qwikster would not become a reality and the DVD and streaming services would not be split after all. The announcement did little to stem the bleeding. In the last quarter, Netflix has lost 800,000 users and seen its share price plummet.

    Thus ends a quixotic attempt to place business needs over consumer needs. It is a classic example of completely misjudging customer sentiment. In an interview with Andrew Goldman at The New York Times, Hastings refers to the debacle as follows:

    We simply moved too quickly, and that’s where you get those missed execution details.

    The problem is that an execution detail for Netflix is a very big deal for the end user. Rather than researching alternative names for the DVD service (as reported in the article), Hastings and team would have been far better off talking to existing customers about their plans. It could have saved a lot of money and embarrassment. Netflix might then have realized that the affection people have for the service is entirely based on the ease and simplicity of the user experience, not love for the intangible Netflix brand.

    So what do you think? Do you agree with my assessment? Why did Netflix get it so wrong?

    This blog post was spotted on Straight Talk with Nigel Hollis

    Comments (0) | Permalink

    Posted by: Nigel Hollis

    Tags: Online, Reputation, Video

  • Luck or judgement: surfing the incessant waves of new business

    05 December 2011

    Why do agencies seem to go through peaks and troughs of winning and losing business? I don't think it’s an accident, I think it’s a rational strategy. 

    When I was working within agencies I spent more than half of my time with some form of new business opportunity on my desk, whether that be a media or advertising pitch, a proposal to write or managing an agency's entire review. I recently tried to tot up the value of the pitches I'd been involved in or managed and it is at least around $7bn in billings terms (which is about the size of Zimbabwe's economy. Or just three of GM’s media pitch). 

    Some years we would win a lot, some years nothing and we always assumed this was due to some natural, unexplainable cycle of peak-and-trough. When we were winning we didn't question it too much of course. However when we were losing we often lost to the same one or two agencies and always considered that the winning agency was having a purple patch whilst we were having a tough streak. Beyond that, there was no rational explanation. We always fought hard at every review we decided to go for so losing was always a shock beyond the normal disappointment.

    Now on the consulting side and having more visibility of the different ways that agencies pitch I can see more clearly perhaps why these trends might exist. Put simply, I think that agencies themselves work in cycles of winning and losing. It is clear that some agencies will over-invest in their business development resources for a period (probably on a 3-5 year cycle) and then spend the next few years investing less in business development and focusing on bedding in the new business that they have hopefully won. 

    No agency can manage to win pitches consistently over the years because the focus of the agency primarily has to be on either winning or servicing. I don't believe you can ever do both at any one time. It takes a huge concerted effort to land the big pitches, these cause a massive distraction and disruption to any agency that has not staffed up its business development resources to take much of this strain. It also requires that the agency has to gamble somewhat on slightly dialing down servicing their existing clients to free up sufficient resource to focus on pitching. This is a gamble because you don’t want to start losing business while you are in the process of winning.

    In addition, the agency management must be aligned behind that strategy and also (without exception) be prepared to divert a good proportion of their work time towards winning business, which is hard when the day-to-day operations of existing client are so consuming. 

    The model is akin to the 'crop rotation' approach that those farmers and geography students amongst you will know well. Work the land hard in cycles, giving it room in between to replenish its energy.

    The implications here are that it means an agency has to make a considered long term plan for the coming 5-10 years an identify when to put the foot on the gas and look to win, and when to ease off and consolidate what you've won. Winning of course is more than a simple determination. It’s hard competing in an industry with too much competition in the agency market and ever increasing demands of clients in managing agency reviews, it requires incredible dedication to the process of a pitch to even have a sniff of victory. 

    Much like a talented racing driver seeking the fastest qualifying lap, each 4 year cycle of business development can be broken down into laps:

    Entry lap (get the right resource and structure in place),

    Warm up lap (be prepared to compete and lose a few but get match fit and tweak the process),

    Flying lap (pitch for everything you can and try and win everything going), 

    Warm down lap (pick off a few more before dialing down your over investment and spent the next few years over-servicing those clients to reach maximum profitability).

    Tom Denford, founding partner, ID Comms

    Comments (0) | Permalink

    Posted by: Tom Denford

    Tags: Business models, Agency Developments