Pricing Digital Creative Services

Joseph Alois Schumpeter was an economist who studied in Vienna and London. I would put him in the top five of all economists in history along with Adam Smith, Karl Marx, John Maynard Keynes and Friedrich Hayek. He popularized the term “creative destruction” in economic and political circles. After a failed early marriage and living beyond his means in London, a friend wangled a job for him managing the estate of an Egyptian princess living in Cairo. He jumped at the lucrative position and was quite successful. It turns out that the prior trustees had been stealing the princess blind. By simply taking his precise contractual fee, Schumpeter was able to lower rents for the tenants of the princess to their great delight yet still managed to double her annual income. Once things were set up his time was largely his own and he drafted his first book, THE THEORY OF ECONOMIC DEVELOPMENT. His reputation spread and soon he was called back to Vienna as a professor.

Why tell this story? Well, it reminds me a bit of what has been happening over the last 15 years in the digital advertising arena. Some years back, when the internet was just getting rolling as an advertising medium, a new player showed up at a large client that I handled. He was not too smooth and people said that he was not the sharpest tool in the shed regarding marketing or media. I tried to be a bit kinder than that as he seemed to simply use different terms for certain items than we did and when any one used a standard term he would often blurt out “what’s that” which had some people stifling laughs. After a while I noticed how he seemed to have an inordinate interest on the cost of all creative jobs, copying and anything that could be remotely defined as “digital.” When he asked what a job cost he would write it down and sometimes smile and other times frown but he would not comment.

I bumped in to him once by accident at a social gathering two weeks before we were to begin negotiations for a multi-year contract renewal. He told me that we had better lower fees for certain jobs or we would be on very thin ice. I got him a drink and he opened up to me. He essentially said, “You have always treated me with respect but your associates do not. Yes, I have had five jobs in the last eight years. In that time, I have dealt with seven agencies and I monitor fees closely. You guys charge way too much on certain items. I am not the marketing director but you are not going to rip us off any longer.”

The next day I reported back to the CEO and we did some digging. Yes, we were overcharging for some items but, after checking with other shops around the country, we were virtually giving other tasks away. We slashed prices on the sensitive items and obtained the contract renewal. The client moved on a year or so later and I doubt his boss had a clue about how much his lieutenant had saved the company.

Were we really price gouging? I talked to some people recently and a common thread ran through their comments. One CEO who retired in the last few years weighed in as follows: “Don, when digital began we were clueless. We did not know what to charge. So, we took some guesses and found we were high in some places and low in others. When new young designers came on board, we got a handle on what others were charging. Still, we got stung by boutiques who could do a job overnight for a third of what we charged. As young talent moved client side, we had to adjust quickly as they had contacts all over. My successor is a great guy and ethical. He asked me how to bill attempts at viral videos.  Charging by the number of hours would not work so he puts two young creatives on the job who work nights and weekends as they love the assignment. Their batting average stinks. They are way below the Mendoza line (this is a baseball term attributed to George Brett describing a hitter in a slump with a batting average below .200 which was the normal average of infielder Mario Mendoza). Now, there appears to be some niche shops who know how to make them work with some consistency. How do we price something we know will likely not work?”

Another mid-sized CEO takes a different approach. “While no two compensation agreements are alike, we try to do a flat fee for all agency services allowing us to make what we think is a fair profit. We may lose our shirt on some tasks but, overall, the clients know we are playing things straight with them. By doing this, we are learning a lot about new platforms. If we charged a la carte, I am sure that we would be bushwhacked by some boutiques. We are not that big, but we cannot respond as a three person shop can that is truly cutting edge”.

So, the young lions at the boutiques who work quickly and know shortcuts and tricks are beating the small and medium sized shops badly and charging way less. They are the Schumpeters of our new century in terms of providing better service for less money. With scores more changes coming on board on scads of new platforms, traditional agencies who claim to be digitally savvy are in a tight spot.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

My Media "North Star" Indicator

I receive a great deal of mail from Media Realism readers. Almost all write to me directly at doncolemedia@gmail.com as most do not want the world to know their comments. Some say they do not want their boss to know that they agree with me and bosses say that often they do not want their staff to know the same. Also, my subscription list generally has personal rather than business e-mails on it.

Recently, I received an e-mail from someone whom I have never met but he has written to me with some regularity over the last five years. His question to me was “How do you stay focused on what is going on in the business? Is there one thing that you go by as a gold standard? I would appreciate an answer but I realize that my question is very, very hard?”

Actually, it is not difficult at all! A week does not go by when I do not refer to my Media North Star. Early navigators had a hard time determining which way was north as the first compasses were not always accurate. Often, they would hug the coastline as they explored, which was safe but prohibited the discovery of new islands and even continents. If there were no cloud cover, they would look for the North Star knowing that it was always located directly above the North Pole. Such simplicity saved many an explorer until technology improved the game.

Well, I have a North Star which helps me through the noise surrounding today’s media and advertising world. It is not brain surgery. I simply monitor COMMERCIAL AVOIDANCE every chance that I get.

A recent report from Experian suggested a firm link between using some streaming service and cutting the cable cord. In 2013, they reported that 18.1% of households with either a Netflix or Hulu account had cut the cord from a mainstream provider. Three years earlier in 2010, the percentage was merely 12.7%. So, total cord-cutting households now stand at a level of at least 6.6% while three years earlier it was 4.5% of the total household frame. And Aereo (facing a big court case soon), allows you to watch TV without a cable or satellite subscription.

The second screen has really taken hold. Some say that 40% of viewers to TV programming use either a laptop, Smartphone or tablet while they are “watching” programming. Among young adults, various studies peg it as much, much higher. Allow me a rare personal example. This past Sunday I was catching part of the telecast for the Players Golf Championship. As I often do, I had my laptop handy and looked up various statistics on several golfers in the competition. Suddenly, I had four e-mails and one text message from four mature gentlemen in four different states. One even suggested that I toggle back and forth between the NBC telecast and The Golf Channel to catch non-stop action and avoid commercials! Something is happening out there when old men are becoming commercial avoiders instead of coach potatoes who simply pop open another beer and obediently watch the tube.

For years, I have told people that you need more media weight (rating points) than you have in previous days to move the sales needle for a brand. I still get e-mails from marketers saying I am merely a shill for agencies wanting more money. And, a few creative directors blast me by saying that if you make a great spot people will stop and watch it. Well, if 47% have DVR’s, 6.6% have cut the cord, and the second screen distracts only God knows how many from commercial breaks, even the greatest commercial has a difficult time breaking through.

TV is in a very disruptive phase. Why do you think Comcast formed an alliance recently with Netflix and is trying to be the dominant player in broadband with the Time Warner deal? It is very simple. They are smart. Things are changing and faster than ever.

So, may I suggest that you do what I do? Read and discuss all that is happening across the many new media platforms. Yet, remember that TV still gets a huge share of the advertising revenue pie even though their sales results are weakening. You cannot simply “hug the coastline” and hope for the best. Find a North Star as I have and you can avoid being overwhelmed by all the noise going on around us.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or post a comment on the blog.

Word of Mouth Still Reigns

If you ask people with experience in advertising what the most effective medium is you will often find the graybeards smiling and answering “word of mouth.” Some do not say it in the presence of clients but most of us know both intuitively and through experience that nothing tops naturally occuring word of mouth. Why is it so strong? Well, word of mouth essentially means that you have hundreds or thousands and, in a few cases, millions of natural advocates for your brand. The message is perceived by many as both honest and natural. A great example to me is Vanguard Investments. They spend very little in terms of conventional advertising relative to their mutual fund peers. Yet, their rock bottom costs have over time made many of their index fund customers quite well off and they are enthusiastic ambassadors for the company.

Today, people often use word of mouth, viral and buzz marketing interchangeably. This is understandable given online and mobile activity but technically they are distinct avenues. Viral is a message that spreads quickly. It is quasi word of mouth augmented by technology. If it works it is great; if not, it is one more interruption in our busy days. Buzz marketing is something that garners publicity. It can be exciting but often lacks authenticity as companies often hire others to represent them with consumers without disclosing the relationship.

So, what separates word of mouth from viral, buzz and conventional advertising. Here are a few things to keep in mind:

1) Strong word of mouth carries something of value (i.e., Vanguard great long term performance and ultra low costs) that has social or cultural significance.
2) The messages that do the best are ones that consumers create themselves. Vanguard has a hard core group of aficionados who meet regularly who call them themselves “Bogleheads” after Vanguard founder Jack Bogle.
3) All interests are disclosed upfront. There is no deception as there sometimes is with buzz marketing. Things are upfront and aboveboard.
4) In word of mouth the reach of a message is always overshadowed by the impact of results. So, if someone has a You Tube video that goes viral and reaches millions, companies often get very excited. The question to ask is what happened to sales or the companies image. Millions of people watching a consumer made or company crafted video are only good if there was some benefit. As David Ogilvy wrote some 55 years ago, “If it does not sell, it is not creative.”

Word of mouth was not front and center for many years. An occasional retailer might have said, “We do not have to advertise. We have great word of mouth.” Agencies did not discuss it much as you received no commission on it nor did it bubble up from creative departments. Sadly, few people baked it in to the evaluation mix let alone the media mix.

Today, with the explosive growth of social media, word of mouth may finally begin to be getting the recognition that it has long deserved. Young adults may be suspicious of conventional advertising but value their friends' opinions on movies, restaurants, clothing  stores and automobile models. Facebook has only accelerated this trend.

Capturing the effect of word of mouth is not easy but is well worth the effort. A research study, even a modest one, may tell you that your word of mouth is carrying you much farther than the millions that you spend on advertising. As it is often free or usually low cost, this is an avenue well worth pursuing for many marketers. And, of course, word of mouth marketing is now taking a form where it is not spontaneous as in the past. It is emanating from companies blurring the lines between word of mouth, viral and buzz.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Two New Saints Among Many

This past week, Pope Francis oversaw a very special event--the canonization of Pope John XXIII and Pope John Paul II. Adding to the unique event was that retired Pope Benedict XVI attended the service as well. Popes are rarely named saints. The last one canonized was Pope St. Pius X (1903-1914). A number of critics applauded Francis’ action as a shrewd political move as he appealed to the liberal wing of the church with the elevation of Pope John XXIII and the conservative wing with John Paul II.  As a Vaticanophile and a crusty curmudgeon, I felt he moved too quickly. Eyebrows were raised in 1954, when Pius X was named a saint a mere 40 years after his death. John XXIII was 50 years (quick by Vatican standards) and John Paul II was a lightning fast nine years.

With all the buzz about saints, I thought it might be a good time to devote a post to the many living saints I that I track as a demographer. I am talking, of course, about single moms struggling in the marketplace.

Today, there are 10 million single mothers in the U.S. living with at least one child under 18. Their lives are difficult, but if you look at it closely, many are remarkable women whom I would categorize as, well, saints. They work a job, sometimes two, rarely get child support payments, and despite exhaustion and a precarious financial existence, try to bring up decent children and often succeed.

Many of the readers of Media Realism are at ad agencies, TV and Radio stations, or cable providers. There are not a huge number of single moms at these companies for two reasons: 1) to survive, you often have to work overtime and weekends which interferes with day care pickups and 2) many 9 to 5 jobs have been totally eliminated at many places as they are incompatible with working mom imperatives.

So, I polled a few people whom I have known for years, sometime decades, who are owners in multi-unit retail. The results were surprising, and at times, uplifting and moving.

A fellow whom I have known for 25 years owns several franchises in three different concepts. He runs them all with ferocious energy and unfailing good humor. He wrote: “I love single Moms. They are great employees. You do need to be flexible, though. Children get sick and poor children get ill more than most. Once someone has proven themselves as an employee, my wife and I tend to “adopt” them and their children. I have three assistant managers who never miss a PTA meeting or school play or teacher’s conference. My wife drives their kids to the doctor along with Mom. If the bill is stiff, she picks up the difference. These women have earned our trust and I will be damned if they are going to suffer.”

Another fellow at a large company says that he looks the other way and breaks the rules for good employees. “We have strict rules from headquarters about attendance and I have busted them all. Our single Moms tend to be the better employees so I let them go to teacher conferences on company time (illegally) and I spend many lunchtime hours ferrying little ones to and from the doctor’s which my boss, 1200 miles away, would never allow. Once someone has shown themselves to be reliable, I throw much of the rule book out the window. If you want to build loyalty, be human. Corporate guidelines have no heart.”

Single Moms struggle. They are not great targets for many upscale brands. Yet, they live hard lives and try to do the right thing. They deserve our admiration and respect.

I am not suggesting that all 10 million single Moms are saints but more than a few are. If you can, cut them a little slack here and there and you may find that productivity will actually increase in your firm.

If you would like to pursue this topic, consider reading NICKEL AND DIMED by Barbara Ehrenreich, THE WORKNG POOR by David Shipler or THE MORAL UNDERGROUND by Boston College professor Lisa Dodson.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Radio's Rocky Road Ahead

For the past forty years, I have kept close tabs on the advertising revenue of each major medium. Lately, of course, the really dynamic growth has tended to be dominated by on line media and mobile. When you look at traditional or legacy media there have been ups and downs depending on the business cycle. One old time medium, radio, does seem stuck. Radio growth in recent years tends to be crawling along at a 1% compounded growth rate in ad revenue.

I sent some questions out to many of my Media Realism panel members and some friends. The response was mixed. Some said radio was clearly no longer a growth medium but hastened to add that it would always be there. Only a few very young respondents said that the medium was toast. A surprising number of people mentioned a station that was doing great and all such stations tended to be in a top 15 market in a radio metro with a fairly buoyant economy.

My point is that the 1% revenue increase in recent years is an average. For every station that is up 15%, there may be several that are down, sometimes significantly. The same is true of markets. Some Texas markets and a few southeastern metros are seeing solid year to year gains but go out into the hinterlands and it is a different story. A few smaller markets in oil rich North Dakota and Oklahoma appear to be doing great as good paying blue collar jobs abound. In much of America’s heartland, it is a different story. Here a few verbatim comments from station general managers or sales managers:

1) “Last year, I pushed myself and my staff harder than ever. We almost broke even in billing compared to the prior year. Headquarters wanted gains. I fired seven people and the savings in salaries, commissions, and benefits got me close to their objective for me. This year, I have little room to maneuver. We have not had fat in years. Now, I have to take bone. There are no stones left to turn in this market. Everyone knows us but spending is not growing.”
2)“The cable guys are beating our brains out. They come to our established customers and put together attractive packages across a carefully selected range of stations. The smaller clients love being on TV as they could never afford network affiliates. Our market skews older and older folks watch more TV. The new cable GM is a smart young guy who works his tail off. He has raided some of the best radio salespeople in town. How do I compete? Our station has no local talent. It sounds the same as hundreds of others playing the same 30 songs over and over again. We fake community involvement but it is nothing like it was years ago where we mattered in town.”
3) “Two years ago, I told you that I could not wait for corporate to go broke so I could buy my station. I was an arrogant fool. There is no way that I would buy it now even at a really distressed price. The billing base is shrinking. It is almost a structural thing both with our dying industrial base locally and changes in media habits.”
4) A veteran broadcaster who went from radio to TV and, after a couple of firings, is back at radio said, “We have zero pricing power. I did a deal with a TV station recently and we are charging less than we did 22 years ago. Sure, the ratings are lower but they are in TV, too. If I hint at raising rates old friends who I thought were cronies, tell me that if I increase the rates they will go elsewhere. Anytime I called their bluff, the business disappeared.”
5) “Our sports station is doing great. We have a blend of local talent plus ESPN at other times of day. The other stations in our stable are really struggling. I try to have the team package up buys across our offerings but few people bite.”
6) “Radio is not dead but it a no growth medium. You are right about the 1% billing growth in recent years. Remember the rule of 72 from finance class? If I keep up this hot pace, I will double my billing in 72 years. That will play well in New York. :):):)
7) “I have busted my butt the last seven years and we are slightly below where we were in 2007. The situation is similar to what you have written about in Media Realism with mid-sized agencies. You have a few old pros assisted by a bunch of kids. I have kept my best sales guy as he is carrying 80% of the billing. The kids go at it tooth and nail but barely cover their draw most months. After a year or so I fire the worst performers and bring in some new eager young recruits. It cannot keep going on like this.”


We have always said that no two markets are alike. In radio, that is more true than ever. Several people mentioned the tremendous revenue that WTOP, Washington generates. It is, indeed, a great station that does just about everything right. They have a huge news staff and are perfectly situated in our nation’s capitol with more news junkies per capita than anywhere in the country. Couple that with some terrible traffic jams and the station is really in a sweet spot. Yet, their format cannot work in many markets around the country and billing does not exist in most locales to support an extensive team of good reporters.

A very astute media researcher weighed in as follows:

My boss doesn’t think radio is going away anytime soon. In fact, he feels that online is getting credit for too much.  With online’s metrics, advertisers think it’s the end-all.  He hopes that radio can develop metrics that would show its importance in the purchase cycle  -- it creates awareness, but because the audience can’t click on their radio for more information, the media suffers. I really don’t think such metrics can be developed.  We’re still using random duplication in this industry for R&Fs!

                We’re trying to move advertisers into online audio (as we now call it).  Our buying/research software even includes Pandora in a ranker with the Arbitron-measured stations.  I think it’s a disservice, but that’s how the industry is moving”.

A recently retired 40 year radio veteran summed it up this way:

“Radio is like a cockroach it just keeps reinventing itself but I am not sure it has ever seen a predator like the internet. Like all media it is always about content/personalities if you have a strong personality on your station you can survive. We have a radio station in DC, WTOP, that might be the prototype for all radio. For the last few years, they may have been the #1 billing station in the USA.  If you can make your self relevant to your audience you will survive and do well, local news, local traffic. Internet cannot do local news it might be able to do traffic but only in some top markets but the local station can do it better.
The big issue is these huge radio companies are only about what have you done for me lately. Everything is measured by the next or the last quarter, very short term thinking. They do not invest in their salespeople and yet expect them to create revenue in ninety days. If the big companies can get out of the business and let local ownership back in radio might have a chance.”

What do I think? Radio is bleeding but not finished. As long as people drive to work, it will still have a place in American advertising. And, in some markets, some stations are getting some very profitable action out of their web sites. What people fail to recognize is that young people are not embracing it anywhere near to the extent that previous generations did. College kids, and I speak to hundreds, tell me that they listen in the car but never in their dorm rooms or at home. There are just too many other options available that are commercial free and offer exactly what they want, when they want. So, I see a rocky road ahead for radio broadcasters. A few stars will do great but most will struggle and many will fail.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Leapfrog Technologies and Media

Last week I had a conversation with someone about the future of global media. He agreed with me that some exciting things would happen in the developing world and even frontier markets but said that I was way too bullish on the speed of the changes that would occur.

I smiled but countered that their progress will be accelerated compared to past development due to “leapfrog technologies.” Historically, in development, western countries would owe much of their prosperity to expensive infrastructure such as rail lines, great roads, electricity, and telephone networks. As someone who spent the happiest years of my career in Dallas and Atlanta, I would add that air conditioning does not get the credit it deserves for the development of the American southeast and southwest.

Leapfrog technologies have turbo-charged the speed of development and put an upward spike in media usage as they bypass the traditional infrastructure build out that was necessary in prior generations. In essence, they are technologies that allow you to skip a step or two versus previous development paths. A great example was with telephones. About 20 years ago, urban legend has it that the then US West took over the Hungarian telephone system. As they began to update the Budapest lines block by block, apartment houses supers asked to be spiffed by the new phone company or the new lines might not stay in place. The company said no and went wireless.

In Africa, the mobile phone has brought telephony to rural and remote areas of the continent where it never would be profitable to build a network.

To get a handle on the speed of things these days, consider:

1) IOS and Android device adoption has had the fastest technological growth in measured history. Smart devices in the aggregate have grown 10 times faster than the PC’s we embraced in the ’80’s, twice the speed of late 1990’s internet usage, and three times the social media development of recent years.
2) The World Bank has stated that some 80% of the world still lives on less than $10 a day and some 2.56 billion or 35% of the world lives on less than $2 a day.
3) Additionally, the World Bank is projecting that internet usage will jump by 50% from the current 2 billion to 3 billion by early 2016.

With so many people earning under $10 a day, will they soon be buying big flat screen TV’s? Not likely. Yet, many will somehow get a smartphone and will have internet access, music, and video on that single device.

So, if your company is expanding overseas, you need to abandon thinking about legacy media. Perhaps a billion or two prospects of yours will never own a television set. That does not mean, however, that you will not be able to reach them.

If technology has been described as economic fuel, then leapfrog technologies are economic rocket fuel.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Americans Earn Too Much Money?

I was driving on an interstate last week and doing a bit of radio channel hopping. One little snippet got my attention very quickly. Someone was concluding an interview and the guest said (I paraphrase), “The bottom line is that Americans earn too much money. We have had it too good for too long.” Given the flow of traffic, I had to concentrate on my driving and I did not get the name of the guest, interviewer, or station call letters. The brutal candor of the guest stunned me. He obviously would not be welcome at the dwindling number of union halls across the country. So, I did some digging and found out that the mystery man is not the only one in the U.S. with the same opinion.

You continue to hear a lot today about the top 1% in income or net worth (not always the same people) relative to all the rest of Americans. In past eras such as the Great Depression (circa 1929-1941), the very wealthy tended to lower their voices for fear of alienating people or being targeted by thieves due to ostentatious displays of wealth. Today, there appears to be no sense of discretion.

A few years ago, a Greenwich, Connecticut based hedge fund manager boldly said in an after dinner speech that, “The low skilled American worker is the most overpaid worker in the world.” He is not alone. Others financiers at meetings such as the big wingding at Davos, Switzerland have said things to the effect that if the evolving global economy takes four people in India or Southeast Asia out of grinding poverty and an American or two drops out of the middle class, that is a fair trade.

Part of the argument seems to be return on investment. Private equity investors often talk about how by outsourcing work overseas you get people who work for half of what Americans demand, are extremely motivated and just plain tickled to get the work with an American company. Some executives in India look at such tradeoffs coldly. One was quoted as saying, “You had your golden period: now, we will have ours.” Others say that per capita income of the Western middle class has to decline as the developing world rises. Something to the effect of “we will meet somewhere in the middle” is a thought that I have seen across the board in researching this attitude.

You may read this and say, “So what.” Perhaps we have had it too good for too long and don’t people have a chance to rise if they work hard? I cannot argue with that. But, some things gnaw at me a bit. Americans have not had an increase in median income in nearly 30 years. Does that sound like an overpaid group of people to you?

Also, I have an unusual hobby which sometimes serves me well. I love to read annual reports of publicly traded companies. Each week, I probably break down three or four, crunch the numbers, and am amused by the nonsense that CEO’s often put in their letter to shareholders. This past week, I was reading the Wal-Mart annual report (full disclosure--I am not a shareholder). There was a passage in the report that made me sit bolt upright--

“Our business operations are subject to numerous risks, factors and uncertainties, domestically and internationally, which are outside our control … These factors include  changes in the amount of payments made under the Supplement[al] Nutrition Assistance Plan and other public assistance plans, and changes in the eligibility requirements of public assistance plans.”

Wow! This was not picked up much in the mainstream media but some in the blogosphere did jump all over it. BUSINESS INSIDER did weigh in with the following:
“Walmart, for the first time in its annual reports, acknowledges that taxpayer-funded social assistance programs are a significant factor in its revenue and profits. This makes sense, considering that Walmart caters to low-income consumers. But what’s news here is that the company now considers the level of social entitlements given to low-income working and unemployed Americans important enough to underscore it in its cautionary statement.”

Linking this Wal-Mart surprise with the comments of hedge fund managers who sound mysteriously like developing world oligarchs to me, may seem like a bit of a stretch. What the billionaires do not seem to realize is that if Americans earn even less, who will continue to buy the products that made them their billions? A vibrant American middle class is good for business and good for democracy.

Part of this situation has its roots in free trade. As tariffs have been removed and markets have opened up across the globe, companies move their facilities to lands where wages are lower but quality of output is not diminished. I have no argument with that. For the past 200 years, free trade has always caused dislocations in labor but the consumer and participating countries generally benefited. What I cannot understand is why some of the people who have benefited the most from opening markets behave as insensitive louts and attack those who are being hurt in the transition.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com