The following is an excerpt from Madison Valley: Building Digital Products. Getting the Most out of Talent. And How Madison Avenue Can Be More like Silicon Valley. The book is about a topic we spend a bit of time discussing on this site: if, and how, marketing companies can adopt the behaviors of tech companies. According to the author: "Every agency wants to build a lab and make products. Every award show adds product innovation categories. But we haven't yet seen a successful product coming out of an ad agency. This book gives an analysis on how product innovation is treated in agencies today, what needs to change and why it's about more than just the product."
Let’s start with an example of how product innovation works today in many digitally focused agencies. They are promoting a strategy to their clients called "Campaigns and Platforms" and it works like this: In a campaign world, when you want to talk to Timmy, you will have to spend money every time, buying media placements for your messages. I call it "Filling the Blanks." There is a blank in the magazine you can buy, a blank on that TV show or a blank on that website. Also, if you show Timmy the same message every time, he will quickly get bored, so you have to change it up. This makes ad campaigns temporary communication tools. If you want to reach Timmy again, you will have to run another campaign.
As a cool graph, it kind of looks like this:
This campaign cycle is awesome for ad agencies. They always have to keep creating new campaigns because making one and running that forever would just annoy people. It’s also what keeps them in business, because to survive with this campaign cycle, as a brand, you will have to keep spending. The temporary nature of a traditional campaign is the reason why creatives keep getting new briefs every other week. It’s also the reason why most ad agencies still run on retainers and not project fees.
But what if the agency would create something that isn’t temporary? Something non-disposable. That’s where platforms come in. In this case, a platform is some sort of digitally connected tool that has a benefit for the user, which (in the best case) integrates into their daily lives. Now, a brand has a direct communication channel to that person and does not have to spend money every time they want to reach them. In its simplest form this could just be a Twitter account.
With digital platforms in play, campaigns are being used not just to talk about how great the brand is, but also to build up a user base on that platform. The platform becomes the Rolodex to save all those contacts you bought with paid media.
As a cool graph, it kind of looks like this:
Here’s something that should be obvious—what they call a platform is nothing more than a new product. But by wrapping it in this strategy, digital agencies found a marketing reason to sell a product idea.
Most of these agencies are more likely to talk to a CMO then to a CEO, which makes the barriers to get funds approved to build a new product much higher. But if the product serves a marketing goal, it’s easier to get marketing dollars to build it, which is usually a budget the CMO controls. So if you’re an ad agency with no credibility in the product world and you want to get your feet wet, this might be the most important rule to obey to get started: find a marketing reason to sell a product idea.
From a business perspective, what digital agencies are doing well is they are producing most of their work in-house, on an hourly-based fee. The agency becomes an outsourced product team for the client and which makes the client dependent on them. If the client wants to leave the agency, they would risk killing the product they’ve created together with the agency, as a transition to a whole new team can be a difficult process. However, for the client, this is a very expensive model because the agency can charge for any little change to the product on an hourly basis. With an average rate of about $200/hour, something like a quick color change on a button can easily become a $1,000+ job.
As this work becomes so expensive, the quality of the product often suffers and what is finally launched is far away from what the agency and client dreamed up at the beginning of the process.
For agencies the model thus becomes:
Great for business. Bad for the product.
Since the 1960s there has been a process established for campaign development. Everything from concepting to airing a new TV commercial has been template-ized with well-defined roles at each point in the process. At its core, a spot from 10 years ago is similarly produced to the one you saw today.
This is not true for product development. Even though many smart people and companies have found a system of creating things, there is no real template to follow because every product is very different from the next. Yet when agencies start doing product work, the way they treat the production of an app, for example, is very similar to the way they treat the production of a TV spot. This has two effects:
1. It’s a torch relay
Just like in a TV production, each person finishes his or her work first, before the next one starts. That means the designer completely designs the app before the developer even starts to code anything. Though this can sometimes work, it also bears some risks, such as the developer finding mistakes in the design at a very late phase in the process.
2. An ad agency is not set up to maintain
In a campaign process, people are used to making some thing, put it out there and then never touch it again. This does not work with products, because they need on-going maintenance and a dedicated team to further develop it and deliver support.
This second effect is creating something I believe you see happening with most product-like ideas coming out of ad agencies:
They Spike and Die.
When most ad agencies launch something product-like, they have no plan in place on how to maintain it. They treat the launch of a product the same way they treat the launch of a new campaign and therefore have no teams set up to maintain it afterwards. And as soon as they get their press and maybe some awards, an ad agency will lose interest in the product and move on to the next thing. Also, as most of these products are paid for by marketing dollars, the budget is only to make it, not to continuously maintain it. When an agency loses the funding for a project, they will lose interest as well. To seriously create a product, the budget has to be planned years out, not just until launch.
Agencies owned by holding companies can have different goals than their clients, because shareholders have determined the goal to be "how can we suck as much money out of a client in a quarter as possible?"
An agency’s business model does not care about the success of a client’s product. Some people might argue that this is not true, that the more successful a client is, the more potential budget there is for advertising. This is a very hopeful point of view. The people who are in the positions of coming up with the work and executing it will have their own goals, as well. Because they aren’t usually financially rewarded for the success of their work, their goals are more about industry awards and filling out their portfolio for their next job.
A friend who is an account guy in an agency put it very nicely. He said:
"Our job is not to make the company successful. Our job is to get our clients promoted."
I believe that independent agencies have an advantage here as they can align their goals easier and with that develop deeper, more honest partnerships and therefore the ability to seriously create products with their clients together.
The only way to make the business goals of the agency and client aligned is to share both the risk as well as reward. Restructuring your billing model by making it a combination of fee + success bonus is one way toward this goal:
The agency gets ownership in the product you help create.
The agency earns a royalty of each unit sold.
3. Success Bonus
If the product reaches pre-defined success metrics, the agency will get a bonus.
4. Completion Bonus
For certain stages of completion, the agency will get a bonus.
5. "Handsome" Bonus
This is basically a "fill in the blank" bonus where you can invent new, creative ways of sharing success.
Creating product work with your clients with a shared interested established will let your agency move from being a vendor to a co-founder of a new venture. For an example, let’s look at Quirky.com. It’s a product design community and company where anyone can submit product ideas. The community then helps to develop them further and the ideas that get the most attention will make it to a final round of judging at the Quirky offices with the potential to be made. The interesting thing about Quirky is their ruthless profit sharing system. Every person who adds to the product idea in the process, however small the contribution might be, receives their fair share of the profits.
It’s especially interesting to look at how much Quirky puts value on just an idea. Here’s their breakdown: The person who submits the idea: 40% Idea Submission.
Among everyone who contributes to an idea, the 5% shares are divided equally.
- 5% Voting for an idea
- 5% Competitor search
- 5% Research projects
- 5% Design contribution
- 5% Name a product
- 5% Tagline
- 5% Style a project
- 5% Price a project
Quirky, acting as the manufacturer, distributor and operator of the new product, receives only 20% of the profits.
In 2006, Crispin Porter + Bogusky took an equity stake in the clothing firm in exchange for their services. Some people might wonder why we have not seen more agencies making deals like this, or even those that have a "mixed" revenue model as core to their business. There are always multiple reasons, but the primary one I believe is the value of advertising is not big enough to give away equity for.
If your only job is to create advertising for a company and that is your main and only strength, it is very hard to ask for equity in exchange for your work. Advertising alone is just not worth it and it is very hard to assign a dollar amount to the value of an advertising campaign, especially if it’s brand work and not a customer acquisition campaign. It’s nearly impossible to truly measure the success of a brand campaign or refresh. When agencies get into product development this is different because you can assign a pretty clear monetary value to business ideas and new products.
Another thought: if an agency’s billing model is solely based on selling talent’s time, inefficiencies get rewarded. Because changes to the work, adding more people to a project and slowing down the process equals more cash in the bank.
Products coming out of ad agencies tend to "spike and die." The big factor here is often agencies are not set up to maintain a product and if they are it becomes massively expensive and a luxury only a very few clients can continue to afford.
Agencies also like to focus on the product and let the client care about the business side of things. But you can’t split these two up. The product itself is as much a business as it’s distribution and funding. So I think agencies have to get away from treating product development like a project and more like the founding of a new company.
When you think about creating a company, you will have to consider a lot of things in addition to the product itself.
First, actually create a company. This can be its own legal entity or just a dedicated team you put together specifically for this product.
I believe agencies should not build a product team internally, but rather build a team together with the client. These are people who are specifically hired for this company, not agency resources. Agency resources can definitely help create a first MVP, minimal viable product, but those resources should not run the company or product. It’s important that the funding for this team comes directly from the funder and not through the agency. Meaning, if it is its own legal entity, the company gets its own funding—very straightforward. If it is a dedicated team, these people should get their paycheck directly from the funder. Creating a directly funded team is financially the most efficient way to create and maintain a new product. And if, as an agency, you believe in and enforce the rule of "my success is your success," you will have an interest in things running efficiently as possible. Money should flow directly to the new venture, and not through, the agency.
Also, when you set your mind to building a company, not just a product, you will automatically feel more dedicated to the other pieces of the puzzle, like sales, distribution and, very important, company culture.
Leif Abraham is a partner at Prehype, a New York-based venture development firm creating new digital products and companies together with startups and bigger corporations. He also serves as creative director for Bark&Co, mentors at startup accelerators Rock Health and Urban.Us and teaches product innovation at the Miami Ad School. Leif co-founded Pay with a Tweet, a social payment system that was acquired by HanseVentures, Germany in 2013. Previously, he was Creative Director, Product Experience at West Studios in San Francisco. He was also a creative director at R/GA in New York and worked at CP+B and Jung von Matt in Germany.