5 reasons why you should fire your digital agency

The vast majority are not suited for e-commerce.

In the Wall Street Journal, Jeff Lanctot wrote, “The days of arbitraging media without adding value are at an end”, and explained why ad agencies must change or else risk being dumped by brands completely.

As the CMO for one of Southeast Asia’s only turnkey e-commerce service providers, we see the urgency for evolution is stronger than ever as brands rapidly shift gears towards winning the online retail space. Brands and their agencies need to mobilise quickly in the land grab for the Southeast Asian online market share. And performance marketing is the fastest way to stake the flag.

So far, advertising agencies have managed to survive the disruption caused by the internet by forming digital units to capitalise on the growth in online advertising. Today, 22% of marketing budgets in the US is spent online with the share expected to grow to 25% by 2015 according to ZenithOptimedia. In response, digital agencies have adapted to provide a wide array of services such as online branding, display, social and search.

Within online advertising, the trend has been a shift towards direct response or performance marketing.

According to a recent e-marketer study, 22% of online advertising spend in the US is from retail, with nearly two-thirds of this going to direct response marketing channels such as search engine marketing. This doesn’t even include the growing share of direct response marketing in other industries impacted by the shift towards e-commerce.

In emerging markets such as Southeast Asia, we expect the share of performance marketing to be even greater than in the US. This is because of the lack of an entrenched, legacy offline advertising business as well as the fact these markets are leapfrogging desktop internet and jumping straight into mobile.

Digital agencies are not well-positioned to leverage this shift towards more performance-based marketing driven by e-commerce. This time around it will be harder for them to catch up with e-commerce. Why?

Because in e-commerce marketing, the goal is not to spend more, but spend better.

1. Inefficient marketing spend

Selling banners online is not that different from selling print ads or outdoor billboard ads. But doing marketing for e-commerce businesses is fundamentally different and is in principle against the DNA of digital agencies, as one of the biggest and most scalable sources of income for them is management fees on media buying.

To make more money, the agencies need to convince their clients to spend more money. Usually this means spending money more inefficiently due to diminishing returns in channels such as display advertising and search engine marketing as volume increases and targeting moves from specific to generic audiences. This is called “the law of diminishing returns” or “the law of shitty click-throughs” in internet marketing parlance, where more scale means less qualified customers.

But in e-commerce marketing, the goal is not to spend more, but to spend better. This translates into spending less, reasoning in line with the “law of shitty click-throughs”. Adopting this kind of model would mean suicide for digital agencies unless there’s another component of revenue.

2. Tweets, likes and other vanity metrics do not drive revenue.

Performance marketing for e-commerce is also different in that it’s very data-driven and technical. People working in this area need to go beyond the usual digital agency vanity metrics such as impressions and clicks and instead think in terms of ROI (return on investment), CLTV (customer lifetime value), CAC (customer acquisition cost), and attribution modelling.

All these require working with large data sets and SQL databases (a special programming language for data). Understanding which metrics matter and how to work with data to optimise towards those metrics is a key success factor in e-commerce businesses.

3. Skill sets are completely different

According to McKinsey, one of the biggest challenges for organisations in our digital age is finding talent with deep analytical skills and with the know-how of how to work with data. In e-commerce businesses this is even more of an issue because of the vast amount of data available. In this competitive landscape, organisations who put emphasis on developing technical marketing skills on an individual level are more likely to succeed. We’re talking about developing people who know how to pull data from databases via SQL themselves and perform in-depth analysis.

Extra value is put on employees who go beyond this and are also capable of writing code to pull data via different APIs. Gone are the days of submitting an IT request or bribing your colleagues in your business intelligence department to take care of your ad hoc analysis. In this new age, marketers are expected to be able to pull the data, run the analysis, and execute on the takeaways in order to move fast.

4. So are the people you need to hire. Don Drapers on the decline.

Growth hacking may be becoming a buzz word to many, but the fundamental shift of marketing to technical is here to stay, as is evidenced in this recent Harvard Business Review article on the rise of the chief marketing technologist. The typical roles at digital agencies such as account managers, media planners, creative directors, and “digital strategy directors” are ill-equipped to do marketing for e-commerce. Most of these people have marketing or communications backgrounds.

I’d like to propose a “Moneyball” approach to talent and where companies look for a diverse set of people with backgrounds in business, engineering, finance, statistics and accounting for our marketing positions.

Two of our recent top hires majored in aeronautical engineering and accounting with no prior digital or marketing experience at all. This is not a new concept – Rocket Internet has been doing this all along across its ventures where they focus on hiring for talent rather than experience with new hires coming from diverse backgrounds. What we’re doing today isn’t marketing (or God forbid – marketing communications) – it is business and finance.

Managing different channels such as Google Search, Facebook Ads and Email Marketing isn’t marketing, it’s investment portfolio management. Optimising campaigns isn’t marketing, it’s algorithmic trading. Performance marketing for revenue-share partnerships as well as SEO isn’t marketing, it’s financial arbitrage. Marketing for e-commerce requires a fundamental paradigm shift with more emphasis on people who are comfortable working with data and the latest technologies.

Digital agencies who refuse to acknowledge this revolution will end up missing the boat.

5. Misaligned incentive structures

As mentioned above, the typical digital agency model is geared towards greater spend on media buying, whose primary measurement of success is the number of clicks or impressions not orders or revenue.

While this has salience in brand awareness, it does not convert eyeballs into sales and that’s where effective e-commerce marketing must go the extra mile with campaigns, for example, leveraging dynamic re-targeting on ad networks such as Facebook Ad Exchange or driving campaigns on mobile that focus on product selling rather than just awareness. The fault is not necessarily the agencies. Often the brand does not allow the agencies to go deep into the right metrics: acquisition, activation and retention. As a result, agencies are not positioned to see the end-to-end, making the entire incentive structure of agencies misaligned.

At aCommerce, we realised early on that we would have to shape ourselves to sustain this more ROI-based model of marketing or face internet Darwinism. We weren’t alone in this. Other end-to-end e-commerce service providers such as eBay Enterprise (formerly GSI Commerce) and Singpost SP eCommerce have invested in the whole e-commerce cycle from marketing all the way to fulfillment and delivery because ultimately, these enablers could not depend on the impressions or tweets of their clients’ creative agencies to convert. We care about the order volume, making our incentives aligned with those of our clients and making both parties benefit from better and smarter marketing, not more marketing.

A good example of this is the LINE chat sales channel in Thailand that 5.5 million users subscribed to. Rather than push out advertisements through the chat app, LINE partnered with brands (through aCommerce’s marketing initiative) and pushed interesting products for which users could buy directly off the app, of which aCommerce fulfilled on the back end. Another example of this symbiotic partnership is with one of our biggest clients, L’Oréal Thailand, in a revenue-share partnership.

Every dollar we make from selling and delivering products gets reinvested back in the partnership in the form of marketing. As long as ROI’s are positive, we keep pushing more marketing. One of the biggest drivers for success for e-commerce marketing in Southeast Asia was ensuring the gains were mutually beneficial. Aligned incentive structures keeps our marketing dollars focused and conversion driven.

What happens next?

Consequently, many e-commerce players and online businesses have deferred to building their own in-house teams so they may leverage the data from the end-to-end process for more targeted marketing. For example, Facebook and Spotify have their own “growth” teams that do all the online marketing and measures the performance and focus on acquisition, activation and retention. Sadly a regular digital agency will never be able to fully do that.

That doesn’t mean that advertising and digital agencies cannot evolve to meet the new demands of e-commerce marketing. However, it will require an immense infrastructural shift, one that requires reworking of the traditional ad spend revenue model, different KPIs, human resources and an overall understanding of how e-commerce is transforming the consumer landscape.

We have the privilege to work in a time where the lines between product awareness and product consumption are blurred and it is up to agencies to adapt or risk being dumped by their brands.

The writer is Sheji Ho, group chief marketing officer at aCommerce.

(Photo courtesy: Shutterstock)