World of Service Providers, June 2015
Each month, we put together a topical list of new & noteworthy happenings in the world of Service Providers. Look for information about digital agencies, creative shops, systems integrators, consulting firms, and everything in between. Here’s what’s been happening in the World of Service Providers – and why it matters – for the month of June, 2015:
HubSpot announced in May that it’s starting a $3 million Agency Growth Fund to invest in its partners and fuel growth. Diamond- and Platinum-tiered agencies of the HubSpot partner program are eligible for interest-free loans to help hire new talent in sales, marketing, and service delivery. The hope is that agencies who take part in the fund will “grow and scale their businesses at a faster pace than traditional agencies.” Provided HubSpot partners meet certain performance criteria, which the company has yet to define pubicly, agency loan participants can forego traditional bank loans in favour of a newer model.
This is an interesting development not only for HubSpot, but also for the world of vendor partnerships. With this forward-thinking loan program, HubSpot is forging a connection between the success and loyalty of its partner network, and its partners’ abilities to sell licenses. Agencies are looking for ways to grow their businesses, while vendors are looking to penetrate the market more deeply. Providing interest-free loans not only secures a productive partner program, but it ensures agencies are growing rapidly with loyalty to the HubSpot platform. The vendor-partnership landscape is becoming increasingly competitive, and those software vendors who manage their channels in an insightful and forward-thinking way are going to achieve success where others may fall short.
Back in 2011, WPP’s GroupM launched Xaxis, a digital agency that “programmatically connects advertisers and publishers to audiences across various channels.” While the home-grown company is not a new venture for WPP, it stands out in one aspect: Xaxis has launched a new unit called Light Reaction. This unit describes itself as a “mobile-first performance advertising business with an innovative outcomes-based, pay-for-performance media model.” While this trend of pay-for-performance models has been talked about for the past few years, it seems it is now moving into the spotlight with WPP’s acquisition of Xaxis. Other major shops like Publicis’ Razorfish are also leading the way, who last year entered into a profit-sharing deal with Peet’s Coffee to boost e-commerce sales. Adage reported in 2013 that over half of agency compensation deals involve pay-for-performance, and it seems that this trend is not dying out any time soon.
What’s the significance of these pay-for-performance business units? If data is driving the results, shouldn’t service providers be aiming to perform their best, always, anyways? The answer lies in customer expectations. With changing agency models, customers are becoming increasingly weary of service providers who promise clients the world. With this in mind, brave new agencies are willing to place bets on the effectiveness of their services, hence the advent of a pay-for-performance model. DCG recently spoke to one executive at a major consulting firm who pointed out, “people like the idea of pay-for-performance. They are willing to pay less if we fail, but they don’t quite like the idea of paying more should we succeed.” Customers, therefore, like the idea of success, but one possible reason the up-and-coming model is not yet mainstream could be brands’ unwillingness to spend more for those successes. The decision to engage in this new kind of model also has to come from the C-suite, as opposed to the more common line of business decision-makers agencies tend to deal with. To be clear, the pay-for-performance model is not yet dominant, and it may or may not take off in coming years. What is clear is that for agencies to be competitive, they will need to figure out a way to work with customers in new emerging models, and in whichever ways customers are demanding.
We have noticed an emerging trend as of late: brands are fundamentally changing the way they interact with agencies. While many brands like Coca-Cola and Volkswagen are reviewing the Agency of Record (AOR) model, others like Best Buy are taking things a step further and ditching the AOR model entirely. Instead, the company will start to consolidate work in-house, and will have agencies bid on major projects ad hoc, like the Christmas shopping season.
This shift in marketing strategy is a significant one. For brands, it means that the way they are interacting with end users is changing. It’s no longer just about TV spots and event sponsorships; it’s about creating an ongoing dialogue with customers. Consumers are demanding interaction over social channels and in communities with the likes of new YouTube stars. Consumers are looking for unique, authentic experiences that promote a value rather than a transaction – look no further than Red Bull, who has built an entire brand around daredevil experiences (like the Red Bull Stratus Skydive from space) and the brand continues to promote community values first and their product second. Consumers are demanding a streamlined customer experience – one that can’t be achieved through a one-way medium such as a traditional TV or magazine advertisement. AORs, of course, do more than this but the relationship is built on an old model, not geared toward an all-consuming-on-whichever-channel-I-want-on-the-latest-technology model.
Dana Anderson, Senior Vice President of marketing strategy & communications for Mondelez International, said in the Wall Street Journal: “It’s time to accept that the Agency of Record model is no longer the pathway to Oz for clients or agencies.” Best Buy’s decision to ditch the AOR model is one way of changing how the company interacts with its customers – doing so puts less focus on the old model, and gives brands an increased ability to focus on new initiatives. While the AOR model is still relevant and hugely popular, it should be noted that brands are starting to change the way they are interacting with consumers, and a shift away from AORs is one such way – not because someone said so, but because brands’ audiences are demanding it.