The Economics of Digital Compared to Traditional Advertising and Media Services

A Marketer’s Guide

By Joe Burton

A fascinating publication was recently published by the American Association of Advertising Agencies written by Joe Burton, McCann Worldwide titled “A Marketer’s Guide to Understanding the Economics of Digital Compared to Traditional Advertising and Media Services”. This 78 page guide examines in detail the shifting landscape, the costs associated with servicing the differences between Traditional and Digital advertising and insights as to how to migrate more traditional agencies and advertisers into the new landscape. Recommendations include:

1. Educate your marketing partners
2. Manage all staffing and fees together verses “silos”
3. Continuous strategic planning and research – build in flexibility
4. Resist temptation to involve all disciplines
5. Going Digital all at once may not be realistic: tier campaigns and markets, set realistic goals
6. Educate your partners to avoid recommendations that may not be in the best interest of advertisers
7. Keep agency resources focused on the work, not on attending meetings
8. Clients-visit your agency to better understand the Digital process first hand
9. Avoid the “shiny new toy” syndrome

It appears entering into the Digital space as an agency incurs higher costs. Mr. Burton lists four primary drivers:

1. Growth in labor intensity
2. Shift from external production resources to in-house agency resources
3. Blurring of lines between media, production and agency services
4. Establishment of new job functions and structures within agencies and client organizations

“All these issues require resources and drive a cost of providing basic Digital services that is directionally double that of traditional “full service” agency fees, when expressed per dollar of media spend. If traditional services are assumed to require staffing and fees that imply an effective commission rate in the range of 12-15% (with media planning and buying services assumed to be 1/3 of the total), Digital can typically require resources equating to an effective commission rate ranging from 25-30% (with media planning and buying services assumed to be ½ the total).”

It remains more important than ever to avoid thinking in silos and to integrate all staffing and fees/budgets together. The relative increase in expense may easily be offset by reduction in media expenditures due to better targeting, measurement and effectiveness increases. Reduced third-party production costs could also be achieved. This combination of cost reductions and improved effectiveness increases the agency’s effective commission rate.

Please download this entire publication – I think you will find it full of great information.