Know The High Cost Of Advertising Agency New Business?

Advertising Agency New Business Is Expensive

12892678_oriSurprising? No.

Over the next few weeks, I am going to be writing about the costs associated with advertising agency new business programs and how to offset these costs by  increasing your win rate and ROI. There are many costs to an agency beyond the high dollar cost. But, since the cash cost has the highest rate of winging… here you go. These calculations are from my pitch book and have been blessed as reasonable averages by my industry contacts.

The Big Metaphor

Agency CEO’s and Business Development Directors occasionally use metaphors to help describe their business development efforts. One of the all-time favorites is how similar agencies are to cobblers and shoes. Cobblers do not have the time to make shoes for their children, and too many agencies don’t make the time to run smart business development programs.

Here’s another metaphor.

Agencies (OK, American agencies) often point to the career batting averages of major league baseball players when they discuss the success rate of their new business programs. As they put it, even baseball Hall of Famers are perceived as victorious if they have a career batting average of .300 or more. That’s only 3 hits for every 10 times at bat. Even the great Hall of Famer Reggie Jackson only had a .261 batting average. In agency think, this would mean that the agency would be Hall of Fame material if they won 3 out of every 10 pitches.

Let’s do some agency math using the Hall Of Fame .300 or 1:3 ratio

Based on my personal experience, conversations with agency CEO’s, and a review of existing data, on average, small to medium agency responds to 10 RFP’s and participates in 6 pitches per year. Your mileage may vary but let’s go with this.

My estimated cost per RFP is $15,000 based on 150 hours of work at a direct labor cost of $100 per hour. At ten RFP’s per year, that’s a participation cost of $150,000 per year.

A conservative estimate of an average finalist pitch, which includes external and internal meetings, pitch management, strategic planning, writing, creative work, pitch design (as in leave-behinds and supporting digital programs), the pitch itself, T&E, and post presentation follow-up costs an agency approximately $35,000. If an agency does 6 pitches per year that’s $210,000.

Obviously, given the size range between multinational networks and small shops, an agency’s mileage may vary but these numbers seem fair for the average agency, and they help frame the issue.

$360,000 Plus

Using my scenario, the total annual cost for RFP’s and pitching comes to $360,000. This number does not include the day-to-day costs of business development. If you add in management, creative, analog and digital market- ing, and business development director time, an agency could easily top out at over $500,000 in labor and outsourced business development costs per year. I am ball-parking here just to get to a reference number.

It can get much more costly. The search consultant David Wethey of Agency Assessments International reports that the average pitch cost per UK agency was £178,000 in 2010. Channeling Las Vegas, as an agency owner I’ve put my own hard earned cash on the line to win new business. As I write this book, Microsoft just handed their international account to Interpublic. Just imagine how much it took to win that pitch.

Bottom line… an agency could easily spend $500,000 to have a “Hall of Fame” business development batting average of .300. Given today’s decreasing creative services industry profit margins, these numbers could be considered depressing.

Do you like this math? I don’t. Here’s one way out.

The Levitan Pitch.

Yes, self-serving self-promotion coming.

TheLevitanPitch_COVER_SmallI wrote The Levitan Pitch. Buy The Book. Win More Pitches. to help advertising agencies dramatically improve their (your!) agency’s business development batting average by improving the effectiveness and efficiency of how you manage and run new business pitches. I believe that this will increase your success rate and importantly, your ROI.

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One Comment

  1. gavin gordon
    | Permalink

    I actually think it’s a simile rather than metaphor, but point taken. Thanks for the article btw. Do agencies have a rule of thumb in the US as cost as a percentage of likely revenue, or is it a judgement call for each pitch?

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