Advertising Agency: Evolution and Types

After reading this article you will learn about:- 1. The Evolution of Advertising Agency 2. Advertising Department within the Organization 3. Types of Advertising Agencies 4. Client Agency Relationship 5. Advertising Agency Compensation.

Developing and implementing an integrated marketing communications programme is usually a complex and detailed process involving the efforts of many persons. As consumers, we generally give little thought to the individuals or organisations that create the clever advertisements that capture our attention or the contests we hope to win.

But for those involved in the marketing process, it is important to understand the nature of the industry and the structure and functions of the organisations involved.

There are many different techniques and sources that companies use in developing their advertising programme. Many companies have their own active advertising department which develop the ad message and select the proper media for its execution.

Other there are full service advertising agencies which develop the entire advertising programme from the conception of idea to the evaluation of the message effects, in consultation and co- operation with the advertiser.

There are special service groups which operate as consultants and who aid either the advertiser, the agency or the media in the development of ads.

“An ad agency is an independent company set up to render specialised services in advertising in particular and in marketing in general.”

Previously ad agencies started as space brokers for handling of the advertisements placed in the Newspapers. Through the years, however, the functions of agency have changed. Their main job today is not to aid media but to serve advertisers.

When a firm has decided upon a advertising programme as part of its overall promotion mix, it needs to have a system and an organisation to implement it for the attainment of the desired objective.

Firms do have an advertising department to manage the advertising function. In some small firms, there may not be a separate department in the name of advertising but the function is either looked after by the marketing manager or the chief executive.

The company’s advertising department usually relies on outside experts after the advertising agency which prepares the advertisement messages, selects appropriate media, and arranges to release them.

The advertising department of a company has only a limited creative function, primarily a liaison point in the company for the agency, though it is responsible for the advertisement budget and supervises the performance of the agency.

An advertising manager has to co-ordinate with the marketing and sales function, so that the advertising efforts may be fully integrated with the firm’s marketing and sales strategy. He has also to perform the managerial task of formulating advertising strategy and planning an advertising programme.

The execution of such programme is managed by this department through the advertising agency. The agency often assists the advertising manager in programme formulation.

The advertising agency is a group of specialists in the area of advertising who meet the client’s needs for advertising services. The agency is predominantly communication oriented, though it solves several problems of marketing and advertising as well. It is a sort of an organisation.

There are several advertising agencies in India and abroad, which take important decisions on advertising and marketing. They suggest suitable measures popularizing the products of the clients. Sometimes, advertising agencies become active partners of producers.

They suggest creative boutiques, independent media buying services, research findings. The advertiser should select an advertising agency on the basis of compatibility, agency size, agency stability, agency team service, selling attitude, creativity and problem solving approach. The advertising agency may be selected as a full scale agency or part scale agency.

The Evolution of Advertising Agency:

The advertising agency developed around 1840 when some individuals started to work as sales representatives. They sold space for their client newspapers on a commission basis. Some bought a set number of pages from the newspaper and sold the space at higher prices to make a profit.

They were called space brokers who believed in price cutting. The space broker stage lasted the period from 1840 to 1876. There was little emphasis on advertising planning and media schedule during this period.

In 1875 N.W Ayer offered an open contract to advertisers, J. Walter Thompson set up shop in Mumbai in 1929 as a part of the UK based agency for eastern operations. It was India’s first advertising agency. E.J. Peter Fielden headed JWT India for the long 37 years, operating out of a room in the Taj Mahal Hotel, JWT worket on Dond’s General Motors, 501 soap (TOMCO) Horlicks, Vaseline, Brown and Poison.

It made its first ad film in 1931 for General Motors, Chevrolet, Kodak, one of its brands, was the first to advertise on radio. The use of demonstration vans with projector units for Horlicks was another pioneering move. Advertis­ing commission, which ranged from 10 to 35 per cent (drool, drool), was brought down to 15 per cent by consensus among all the agencies in the 1960s.

When JWT left a closed and overly nationalist India in the early 1970s, it did not cut off the connection with H.T.A. Training process and information—sharing continued.

In 1993-94, Khanna convinced employers who owned majority stock in HTA to part with 49 per cent of it so JWT could come in. The remaining 51 per cent of HTA’S Rs. 4.9 lakh equity pie is held by senior employees (who cannot sell it, and must relinquish it on leaving).

Advertising Department within the Organization:

Advertising manager and the departmental staff perform two main functions:

(a) Planning the advertising programme and

(b) Maintaining liaison with the advertising agency.

Fig. 20.1 show that the advertising is a part of the marketing function in a typical firm. The dashed line to the advertising agency means that it is not really a part of company’s organisational structure. Nevertheless, the agency is important to the operation of the advertising department.

The advertising manager is responsible for the overall planning of the advertising programme, including such decisions as which products to advertise, which markets to be reached, and whether to employ an outside agency or not.

The manager also maintains this programme within the financial and public relations guidelines set down by corporate management. Corporate management must be advised about advertising policy decisions, since they may affect the corporate image and sales potential of the company.

The over-all responsibility of the advertising manager can be summarised as follows (Fig. 20.2):

Advertising Function: Includes:

1. Making the ad strategy in collaboration.

2. Evaluation of the advertising.

3. Determining the ad efforts.

4. Coordinating with the agency.

5. New developments in advertising.

6. Making the ad budget.

Managerial Functions:

1. Making advertising understandable.

2. Representing the organisation.

3. Goal setting for advertising.

4. Administration in general.

5. Creative thinking with respect to his functions.

6. Participation with higher ups about his function.

Types of Advertising Agencies:

Since advertising agencies can range in size from one or two person operation to large organisations with over 1,000 employees but the services offered and functions performed will vary.

There can be following types of advertising agencies:

(a) Full service agency,

(b) In house agency,

(c) A creative Boutique,

(d) Media buying services,

(e) The La carte agency,

(f) Special service agency (Group).

(a) Full Service Agency:

Full service agency offers its clients a full range of marketing, communications and promotion services including planning, creating the advertisement, performing research and selecting media. A full service agency may also offer non advertising services such as strategic market planning, design of sales promotions, sales training and trade show materials, package design and public relations.

The full service agency is made up of departments that provides the activities needed to perform the various advertising functions and serve the client. (Fig. 20.3)

Functions of Full Service Advertising Agency:

The full service agency performs a complete range of services for the advertiser In addition to offering all research, creative and media services, the full service agency often becomes involved in the advertiser’s marketing process. For example, an agency may provide package design, sales promotion, dealer aids, sales meeting assistance, product testing, sales forecasting, and advice on distribution and marketing strategy.

The benefits of a full service agency include attracting and holding the very best talent, providing numerous services which may require an interrelated approach, and providing an objective examination of concepts from an outside perspective based on wide spread experience.

Despite the emergence of other types of agencies, it is estimated that the major proportion of national advertising media expenditure is spent by advertisers who use full service agencies. The extent of services offered by an agency generally depends on its size and the way it is organised. It also depends on the people who make up the agency.

However, most full service agencies perform the following functions:

(a) Research:

Even prior to the formulation of the plan, an agency must do some research. The scope of research has expanded so much that, in recent years, independent specialised research organisations have been created to meet the expanded needs of both marketing and advertising research.

(b) Planning:

The most important function in agency operation is the development of an advertising plan, usually prepared in conjunction with the client company. The advertising plan viewed as part of the overall marketing plan. An essential part of planning is budgeting and the agency usually provides alternative budget proposals to help the client determine how much should be spent on advertising.

(c) Creative Services:

One of the earliest additions to the responsibilities of the advertising space sales person was the writing of copy. Today copy writers frequently work in conjunction with artists in the preparation of print advertising, and copy writers, art directors, and broadcast producers usually combine their efforts in preparation of broadcast selling messages.

(d) Print and Broadcast Production:

Print production people are responsible for converting and copy into printing plates used to produce finished advertisements. Proofs of advertisements are submitted for approval to clients before final printing plates are made. Print production workers must maintain contacts with printers, typographers, type setters, and photoengravers.

In the early days of television, broadcast productions were prepared by the advertising agency; today, shows are more frequently purchased from networks, broadcasting, stations or independent show producers. However, agency men and women still do the creative work on both radio and television commercials.

They prepare the story boards and choose (and even design) Props, costumes and scenery. The actual mechanical production of the commercial may be done by an out-side producer under the supervision of an agency TV producer.

(e) Media Selection:

One of the areas where the expertise of an advertising agency may be a necessity is media selection. Media choice involves a knowledge of each medium’s characteristics and its coverage, as well as an understanding of the target market to be reached.

An agency must select what it considers to be the best medium, must contact the various media, execute the contracts, and pay media bills. As an aid in the media selection process a number of advertising agencies have applied computer techniques to the creation of media models.

(f) Account Management:

Since the advertising agency is an organisational unit external to the firm, some continuing and close contact must be established to promote communication and understanding between the client and agency. The advertising agency establishes a contact person to maintain this liaison.

In the small agency this function may be performed by the president; the account executive performs as liaison in a larger agency, and, in some cases, there may be an account group consisting of several account executives headed by an account supervisor. The contact person must know the functions and activities of both the agency and client and must be able to interpret these satisfactorily to both organisations.

(g) Accounting:

Although accounting is of prime importance to all business, it has added significance to an agency. Since the agency is responsible for payment to media, it becomes particularly important to keep accurate accounts of billing, to check the appearance of advertisements, and to maintain records of payments.

(h) Other Services:

In order to provide a total marketing concept, agencies become more involved in promotional activities that are not strictly advertising. The extent of services required by clients varies, manufacturers of consumer goods tend to place greater emphasis than industrial goods manufacturers upon the range of an agency’s service in the selection process.

Some agencies provide merchandising for their clients; that is they create sales promotional material, aid in dealer co-operative advertising campaigns, execute point of purchase displays, and help develop contests.

They may also offer expertise in public relations, usually on a fee basis and as an activity some what separate from their advertising. Some larger agencies may go beyond promotion and provide such services as sales forecasting, new product planning, and package development.

Reasons for using a Full Service Advertising Agency:

A full service advertising agency provides the advertiser with a full package of advertising services.

According to John Monsattal followings are the reasons for using a full service advertising agency:

(a) Sales oriented creative work.

(b) Synergistic experience.

(c) Centralisation of responsibility and accountability.

(d) Greater objectivity.

(e) Simplified co-ordination and administration.

(f) Simplifies corrective changes.

(g) Professional strength in marketing area.

(h) Better working environment.

(i) May be less expensive in the long run.

(j) Stronger pool of talent.

(a) Sales Oriented Creative Work:

The agency, because of its specialisation, is continuously concerned with creating such advertisements and ad campaigns that would be sales – oriented, since improving sales is the ultimate goal.

(b) Synergistic Experience:

The agency can use the knowledge obtained by working with various and different kinds of clients in supporting any given client thus using the cumulative knowledge and experience in a synergistic way.

(c) Centralisation of Responsibility and Accountability:

The agency is responsible for the success and failure of a specific advertisement and the total campaign.

(d) Greater Objectivity:

Since the agency becomes closely involved with the organisation, and since it involves studying the characteristics and attributes of a product, the agency is able to assist the client with various product problems.

(e) Simplified Co-Ordination and Administration:

It is easier to develop a close working relationship and Co-ordinate promotional activities with one agency rather than distributing the advertising responsibility to many agencies.

(f) Simplifies Corrective Changes:

Since all the advertising activities are centralized within one agency, necessary changes to promotional messages and campaigns can be incorporated quickly.

(g) Professional Strength in Marketing Area:

A full service advertising agency is a complex organisation in itself, with all the professional functions and processes. Hence the advertising personnel are professionals in the area of marketing, sales promotion etc. and this gives stability and credibility to the advertising profession.

(h) Better Working Environment:

Advertising is very creative and offers challenging opportunities. Accordingly a reliable advertising agency attracts conscientious workers who take pride in doing a first rate job. This creates a better working environment which is always necessary for productive out puts.

(i) May be Less Expensive in the Long Run:

Since the advertising people are specialists and have the expertise in getting the job done, and their survival and credibility depends on the success of their advertising campaigns, they may be less expensive in the long urn rather than doing it one-self in a piecemeal dis-organised manner.

(j) Stronger Pool of Talents:

A full service agency has many specialists dealing in different areas of advertising process working at one location, so that it can react the problems quickly in any of the various aspects of the process.

(b) In-House Agency:

Even though most companies use full service advertising agencies, an organisation may decide to establish its own operation for all services of an advertising agency within its own structure. The in-house agency as its name implies is owned out right by and operated under the direct supervision of the advertiser.

It perform all the creative and media services provided by the traditional full service agency. A major goal in adopting this approach is to reduce the total cost of the advertising.

Merits:

1. It reduces the cost of advertising since the in-house agency is also entitled to the commission from the media, which normally the out side agency would get & which the advertiser himself does not get.

2. It ensures tighter control over the agency operations both in terms of cost as well as creativity.

Demerits:

1. Top agency talents are less likely to be attracted into an in-house agency.

2. An in-house agency may be influenced by built in political forces that might turn bias while an outside agency is more objective in its analysis and evaluation and is less biased.

(c) A Creative Boutique:

It is an agency that provides only creative services. The client may seek outside creative talent because it believes that an extra creative effort is required or because its own employees do not have sufficient skill in this regard. Full service agency often subcontract work to creative boutiques when they are very busy or want to avoid adding full time employees to their payroll.

Creative boutiques are usually founded by members of the creative departments of full service agencies who leave the firm and take with them clients who want to retain their creative talent. These boutiques usually perform the creative function on a free basis.

(d) Media Buying Service:

There are independent companies specialize in the buying of media, particularly radio and TV time. Media buying is a niche service and these agencies are specialized in the analysis and purchase of advertising time & space.

Both agencies and clients utilize their services, usually developing their own media strategies and using the buying service to execute them. Because media buying services purchase such large amounts of time and space, they receive large discounts and can save the small agency or client money or media purchases. Media buying services are paid a fee or commission for their work.

(e) The La Carte Agency:

Some advertisers prefer to order a la carte rather than using all of an agency’s services. A la carte services can be purchased from a full service agency or from an individual firm that specializes only in creative work, media, production, research, or new product development. The two requirements most frequently obtained by a la carte are creative and media services.

A boutique is typically a service agency used as a creative consultant, specialising in concepts, strategy development, and execution. Some advertisers employ a boutique to revitalize a tired advertising campaign or to provide services in specialised media and product categories.

A media buying service works with an advertiser to provide a media plan, offer counseling in the development of the advertiser’s plan, or provide specialised knowledge of media and usage rates. Firms that prepare their own advertising frequently find the complexities of media purchase require the services of a professional.

A la carte services may provide the advertiser with faster response, more objectivity, and more direct communication which may lead to better results. However, the responsibility for planning and managing the advertising remains with the advertiser.

(f) Special Service Agency (Group):

Some agencies focus their efforts only in some selected areas and then become specialists in those areas. There is great multiplicity of firms whose objective is to provide advertisers, advertising agencies and the advertising media with a host of specialized services.

These firms collectively are called special service groups and they are by far the least known component of the advertising industry. For example, if an agency is specialising in direct response advertising either in media or direct mail, knowledge of their availability and function is vital if the structure of the advertising business is to be fully understood.

Client Agency Relationship:

Even though much of the responsibility of maintaining a congenial liaison between the agency and the advertiser falls on the accounts executive, there are certain ground rules pertaining to the efficient handling of issues.

A leading advertiser, George Weissman, vice chairman, Philip Morris, incorporated speaking as a client outlined 10 requirements that a company expects from its advertising agency:

1. We expect your people to be with the consumers, the retailers, the wholesalers and in the front lines, where the business is done and the battle is fought.

2. We expect your people to say on your account and not be taken away by competitors. We as you, have investment in them and, if they are good, we want them.

3. We expect total involvement at all levels of agency management.

4. We expect you to have the same corporate affirmative action policy on personnel on our accounts as we do.

5. We expect your people to give us every crazy idea they might have, even though the rate of rejection is high and the work load heavy.

6. We expect your people to know the industry as well as we do.

7. We expect excellence in everything you do. We have built a corporate reputation and a corporate success based on outstanding quality of product, advertising, merchan­dising and most important of all – people.

8. We expect to be presented with options—good advertising dependent on mutual creativity.

9. We expect your people to be honest with us and not ‘yes’ us.

10. We expect that your people will know out business almost as well as we do, and that goes from the technical to the marketing, so that if there are potential for interesting advertising, it will be created.

Advertising Agency Compensation:

All business need operating revenues to service. Advertising agency revenues come from two sources:

1. Commission from advertising media.

2. Client fees.

The billing based compensation system, frequently labeled as the “commission system”, provides the agency with money from the advertising medium. The commission is a percentage based on the medium’s charge for the advertising space or time used by the advertiser.

With the cost based compensation system, often called the “fee system”, the agency receives fixed fees for services given to the clients with media commissions offset against those fees. The typical agency today receives about two third of its revenue from media commissions.

An advertising agency can be compensated in the following manner:

(a) Commission basis

(b) Cost basis or fee system.

(a) Commission Basis:

The traditional method of compensating agencies is through a commission system. Commission is a percentage based on the medium’s charge for the advertising space or time used by the advertiser. A agency receives a specified commission usually 15% from the media on any advertising time or space it purchases for its clients. Some trade publications allow as much as 20%.

There must be a clear understanding between the agency and the advertiser as to what services this commission covers. It is quite common for the agencies to provide media planning and media buying and some related creative work for the 15% commission that they charge and bill the advertiser separately for other services such as market research, public relations etc.

For many years there has been a criticism of the commission system of payment of advertising agencies. For example, why should an agency receive a 15% commission from the media rather than being paid by the client? For example, the two agencies may require the some amount of effort to create and produce an advertisement.

However, one client may spend Rs, 2,00,000 in media which result Rs. 30,000 as the agency income while other spends Rs. 20,00,000 generating Rs. 3,00,000 as commission. Critics argue that the commission system encourages agencies to recommend high media expenditures to increase their commission level.

Other criticism is that there is no established rule for what services are included in the 15% commission.

Another criticism of this system is that it ties agency compensation to media costs. In periods of media cost inflation, the agency is (according to client) disproportionately rewarded. This system is also being criticized for encouraging agencies to ignore cost accounting system to justify the expenses attributable to work on a particular account.

(b) Cost Based or Fee System:

The system is based upon the cost of performing the services which includes direct and indirect costs of servicing the account plus a percentage mark up for profit.

Agency executives sometimes feel that the 15% commission yield an insufficient return to the agency in the light of its many services to the client. This is true when the agency is working with small accounts. On the other hand advertiser may argue that the commission rate going to the agency is too high.

According to David Ogilvy, the fee approach to agency compensation has five edges over the commission system:

1. The agency can be more objective in its recommendations as so many clients believe.

2. The agency has adequate incentive to provide non-commissionable services if needed.

3. The agency’s income is stabilized. Unforeseen cuts in advertising expenditure do not result in red figures or temporary personnel layoffs.

4. The fee enables the agency to make a fair profit on services rendered. The advertiser, in turn, pays for what he gets—no more, no less.

5. Every fee account pays its own way. Unprofitable accounts do not ride on the coattails of profitable accounts.