This post originally started out as an email/Quora exchange between me and @jonsteinberg but thought that the world would benefit from reading about this so I decide to open it up. Note: These are my thoughts and not necessarily representative by my employer.
Here is the initial tweet by Jon.
Last night in episode 4.11, Sterling Cooper Draper Price lost it’s key client American Tobacco of which has been a loyal client for decades. Like in most industries, the advertising industry is no different where they are a few “key” clients that make up the majority of revenue (I like to say “keep the lights on”) and then additional clients that are just as important, but are smaller in size. For SCDP, this is a major loss because it’s a backbone client.
During the partner meeting in the episode, one of the agency partners mention that $20MM of gross billings is not enough. To the uneducated agency world, this sounds like a grandiose and absurd statement (maybe why Jon picked up on this) so I’d like to clarify this.
$20MM in revenue is different than $20MM in billings. How it was positioned in the episode was gross billings. This in the digital media startup world would be like saying a startup has $50MM in gross sales, or Groupon did $500MM in gross sales last year (or something along those lines). If a startup spends $50MM to achieve $50MM in gross sales, then it’s not a healthy business.
Within the agency world, the $20MM in gross billings may go into media placements, production (significant since most was TV), staffing, etc. At the end of the day, a couple hundred thousand or million may be left over, but not much more. Thus, why there is so much debate on Madison Avenue right now for alternative compensation models.
For SCDP, losing $20MM in gross billings from it’s backbone client has ripple effects: all the things you can imagine. Agencies like to leverage their scale to afford resources for many of their clients and when a major account is lost, sometimes that resource must be forfeited. Examples of this resource could be research, talent, infrastructure, and other capital expenditures. Without a backbone client, their service levels may degrade for all their other clients… thus, why you saw Glu-Coat (?) pull their business.
The way the agency should have phrased this was “we lost $20MM gross billings AND our backbone client.”
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