Back in the good old days of advertising it was customary to staff up new accounts well before they actually billed a cent. Agencies knew that once the product was launched it would spend money on TV and generate the very generous income stream that came with a 15% commission.
The cost/benefit calculation favored the Agency. It was good business.
But it also had a negative consequence.
Agencies came to believe that Accounts that are running at a loss could be turned around and made profitable.
This may have been true at some point in time but it certainly is not today.
Most fees are based on a scope of work that dictates man-hours, overhead, and an “acceptable” profit. With luck there might be a few months bonus. The “upside” that commissions provided no longer exists.
There is nothing that will make up losses that you have already incurred.
Some people will argue that this is an investment in getting more business from the Client.
This is a dangerously flawed argument.
The Client already has a benchmark with the current fee agreement. Why in the world should he pay the Agency more money for a new Brand than for the existing business? And why should the Agency make money on future assignments if they cannot do it now?
There is no justification for running an account at a loss.
Agencies need to quickly lose the losers!