At some point, many small businesses contract with an advertising agency to help direct marketing, promotions and public relations efforts. This decision often creates a stumbling block for many businesses struggling to grow and enhance profitability. While hiring the right advertising agency will improve marketing direction and synergy for a small business, the wrong decision will set a company's growth back years or even worse.
In its simplest form, an advertising agency creates marketing messages and purchases advertising time or space to disseminate said messages. This activity could take many forms from developing and deploying websites to writing press releases to creating commercial messages for electronic media. Some advertising agencies specialize in specific media such as Internet, print, radio or television. Other agencies offer marketing research such as focus groups and market surveys.
Large companies are likely to hire numerous advertising agencies to work in concert with company creative directors. They may hire one agency for creating marketing messages and then others to buy advertising time or space. Many also hire public relations firms for corporate image consultation and press relations. Some larger companies might hire additional firms to hold the original agencies accountable.
Comparatively, a small business would likely have to rely on a single multi-purpose advertising agency for all or most of these functions. That agency would develop a marketing plan, work with the business to craft marketing messages and negotiate contracts for commercial schedules. Additionally, the agency could build the company's website, manage its social networking presence and conduct market research.
The agency and small business would agree on metrics for the reach of their marketing campaigns and the desired response from their efforts. These metrics could be in terms of media ratings, customer perceptions or specific revenue targets.
Many smaller advertising agencies don't have the capability, experience or expertise to manage all marketing responsibilities effectively. Even if one agency could do so, it would cost more than the average small business could reasonably afford. The business would have to invest too much of its marketing budget in compensating the agency and not enough in directly recruiting customers.
As a workable solution, a business could hire an advertising agency to manage specific aspects of its marketing such as developing commercials and purchasing media time. The business owner or manager then takes an active role in developing a marketing plan and managing media budgets. In this scenario, the agency becomes a consultant and performs specific services. Decisions are still made at the company level.
The investment associated with hiring an advertising agency could be minimal to considerable. Typically, agencies will bill a commission, usually 15 percent, of media ad schedules in addition to hourly or fixed fees for specific services.
Media outlets often pay the agency commission on schedules purchased. While an advertising business pays the "gross" to its agency, the agency representing that business is only responsible to media companies for the "net."
For example, if an advertising agency places a $1,000 gross schedule with a local radio station, the agency would be responsible for the net of $850. The agency would then bill the advertising business for the full $1,000. The $150 difference between what the business pays the advertising agency and what the agency pays the radio station represents the agency's compensation.
To complicate matters, many media outlets do not pay agency commission. Consequently, an agency would have to "gross up" a media transaction by adding 15% or the agreed upon percentage to a media outlet's invoice. The business would then be responsible to the advertising agency for the additional "grossed up" cost.
Another consideration is that many media outlets sometimes charge higher rates to companies represented by advertising agencies. While it may appear that the television or radio station is paying for the agency's services, those costs are being transferred to the advertising business. As a general rule, a business should assume that it is paying for at least some of an agency's commissions directly or through higher media costs.
Advertising agency fees are based on experience, services offered, the market a business operates in and the types of media being used. While most agencies charge for such services based on billable hours, some charge flat fees.
Many agencies bill for interactive media services such as building websites, search engine optimization and marketing, setting up email databases and managing social networking sites. Advertising agencies may also charge for creative services ranging from commercial production and print ad creation to marketing message research.
To begin with, most small business owners manage their own marketing efforts. Through trial and error, they make a name for their business. Many are then barraged by salespeople representing a wide array of advertising options. It's at this point that an advertising agency would offer to simplify the process.
The problem arises when business owners are unable or unwilling to properly vet the advertising agencies. Since there are generally no licensing boards or education requirements, there is no simple way to determine if a particular agency is capable of creating and managing a company's marketing.
As business owners often find out the hard way, many advertising agencies consist of one or two people with a limited skill set. In many cases, these agencies are started by former media salespeople who left their particular media outlets. They might offer a "one size fits all" approach to marketing. They are often skilled at buying a single media (i.e. television, newspaper or radio), and they tend to have many or all of their clients using similar media plans and ad copy.
There are also many effective small business-focused agencies that create comprehensive marketing and media plans, offer marketing accountability metrics and can provide a variety of services to their clients. These agencies work with clients to build and implement comprehensive marketing plans. They also continually monitor success metrics and adapt marketing plans as needed.
It's up to the business owner to make sure she or he hires the right advertising agency. That owner should stay actively involved with the agency to ensure the implementation of an effective marketing strategy. The small business landscape is littered with businesses that do not get the marketing help they need or chose the wrong marketing representation for the wrong reasons. Some of those businesses struggle year in and year out. Some move on to better agency representation. Some have closed their doors. Which path will you choose?
- Ryan Ellwood