Prior to an agency search process, many clients often ask us: “What is the cost of switching our agency?” To which the answer is complex and never the same, as the level of involvement with agencies as well as the industry, in which you are operating in, is a decisive factor when determining switching costs.
To provide the audience with knowledge in this field, our second viewpoint is based on this topic, ultimately illuminating challenges for both clients and agencies. Our knowledge is primarily based on experience from various agency searches, in which considerations to agency switching costs are highly important.
What are agency switching costs?
When considering replacing your agency, the role of switching costs becomes relevant. We categorize these switching costs as the money, time and effort used in building a new relationship, as well as the costs of exiting a relationship. Clients incur set-up costs and exit costs respectively.
Set-up costs in advertising occur because clients need to guide and direct their agency representatives to ensure that agency knowledge, skills and expertise are transformed into client value. Exit costs are apparent when that value is lost by later switching agency. The exit cost can be lost opportunities with the former agency or a potential leak of proprietary client knowledge involving sensitive commercial data of value for competitors.
Some of the most evident switching costs that we highlight when consulting clients, are listed below:
1. Costs associated with ending an agency relationship:
§ Breach of contract that could lead to agency compensation
§ Sunk costs such as lost opportunities with the existing agency
§ Threat of proprietary client knowledge being transferred to potential competitors
2. Costs associated with finding a new agency:
§ External: Search Consultants running the agency search process
§ Internal: Client resources used in the agency search process
3. Costs associated with entering a new agency relationship:
§ Learning costs in relation to providing knowledge about the company, products and values
§ Streamlining processes both ways running
§ Costs associated with accepting uncertainty in regards to outcome from the new agency
§ The emotional and psychological costs involved in building a relationship and gaining trust
It should be noted that the industry in which one is operating also plays a significant role in connection to measuring switching costs. As for instance industries that require a high degree of technical product knowledge, often seen in durables, has higher switching cost associated with changing agency. This ultimately means that agencies operating with these types of clients often enjoy longer relationships.
When looking into some of the aforementioned switching costs, the level of commitment between client and agency becomes important to analyze, as this level will determine how high the cost of replacing an agency will be. It can therefore be helpful to determine where in a relationship life cycle the relationship between agency and client is placed.
The time spent on building the relationship will indicate whether the relationship is in the initial phase, the transitional phase or if it has moved to a mature stage, in which the switching costs are the most expensive.