1% - The Bottomless Pit!

By Siddhartha

This is the end…Hold your breath and count to ten….

Well, the advertising industry is facing an existential crisis and it’s their own doing. The writing was on the wall with AI taking a swipe at the agency business model.

The execution nature of marketing and advertising services makes it easier to disrupt for a technology that compounds intelligence and knowledge at scale. The MOAT that advertising agencies have is the knowledge they possess at executing marketing tactics and making ads that connect with consumers.

AI Drives in the Median Lane

The AI wave is just doing what it was supposed to do, make median knowledge easily accessible. I know for a fact that folks on the client/brand side feel that AI can double up as a great marketing assistant as they have ready access to the tool that challenges the tactics and plans of agencies, something that helps them to show off tactical execution chops in front of agency folks.

Firstly, folks on the brand side who are responsible for media/marketing, if they rely on ChatGPT for proving certain tactical knowledge, then the question should be asked of their capabilities, more than anything else.

I have heard of senior agency leads telling me how brand side folks are requesting for llm prompts to be given as a deliverable!

The question of existence is a valid one as adland is cutting headcount, being rather homogenous about AI – everybody seems to be using it the same way or positioning it the same way, which is mostly as an efficiency multiplier coupled with data orchestration for targeted audience outreach.

There is no true differentiation at play anymore but that’s still doesn’t count as the musings of an end.

Valuation still paramount

If a book had to be written years from now about the current phase, it can be aptly titled “How Agencies devalued themselves into Oblivion”. The death is slowly being written in pitch rooms and in contracts.

There used to be a time when pitches were awarded to the best ideas, strongest strategies, clever outreach tactics and they came with a healthy commission coupled with a retainer.

Nowadays the pitch rooms are inverse auction rooms, lowest bidder wins, it is madness. Whatever be the end pricing, outcome/hybrid/commission/retainer, the values have been driven down to the ground.

I’ve been hearing stories of how large reputed HoldCos are winning pitches by quoting 1% commission, no retainer. I shudder to think, in the age dwindling trading incomes how are some shops making money at a local market level or they are just relying on global/regional work to keep their lights on and some of them do have an advantage of charging a premium upstream for the infrastructure play coupled with consulting.

Ball is in the Indie court

It is indeed a bad time to be an Indie from a growth perspective, I reckon as rock bottom pricing of their work coupled with the competition from Holdcos whose commercials come naturally embedded with an ‘economies of scale advantage.’

There’s another way of looking at what’s playing out, clearly most brands/clients treat marketing spend as a cost center and that’s why they encourage reverse auction room scenarios. It is quite surprising that the all the talk of marketing to be treated as a growth center hasn’t been paid much heed and brands are essentially looking to save money rather than drive growth.

It’s not as if some of the brands who start a lowest bidder wins pricing war cannot afford to revitalize their energies to make their marketing efforts more intrinsic to business growth, they can but internal factors hold them back.

If one takes an analogy of the aviation sector, marketing and advertising agencies should not shy away from positioning themselves as Singapore Airlines rather than indulging in a pricing war to a bottomless pit. Sometimes it indeed takes a village…. Are Malaysian Indies willing to hold their ground and force brands to move up the value chain? Only time will tell!

Siddhartha is an advertising & marketing leader with 15 years of experience spanning South Asia & Southeast Asia. He currently runs Digital Lexicon, a boutique digital products firm. They’ve developed MarginMix & Headroom and pride themselves in operating at the Intersection of Enterprise Profitability & Human Endeavour, especially in the Marketing & Advertising services space. Siddhartha lives in Kuala Lumpur.