Search engine marketing agencies will face many business challenges over the next couple of years, including increased competition, fee pressure, clients bringing SEM in-house and a decline in the prominence of SEM in general. SEM agencies that fail to pivot into broad-based digital agencies will either need to focus exclusively on small business SEM or cease to exist.
Why do companies hire agencies?
There are two vectors against which companies evaluate agencies: 1) the value that the agency provides; and 2) the scarcity of the agency’s services. For agencies, scarcity is determined by two criteria: a) the number of other agencies that offer the same service; and b) a potential client’s ability to perform the same service in-house. When you plot these factors on a chart, it looks like this:
As the chart shows, agencies tend to attract business when they can fulfill a scarce need. As supply increases, agencies lose their leverage with clients, resulting in either price wars between agencies (essentially commoditization) or clients bringing services in-house.
There are two additional points that need to be stated here. First, “scarcity” is a subjective term. For example, a company may not understand the difference between a seasoned marketing pro and a college grad with a year or two of marketing experience. Thus, when comparing agency services versus hiring in-house, the company may mistakenly conclude that there is a plentiful supply of expertise, when in fact they are making an apples-to-oranges comparison.
From an agency perspective, however, client perceptions are far more important than reality. In other words, if a client believes the agency’s services are a commodity, they are a commodity, at least with respect to that client.
Second, scarcity and value are not static values. Rather, both change constantly based on market conditions. For example, there was a time when the value of advertising in the yellow pages was very high, but that value continues to drop every year. Similarly, the scarcity of expertise generally declines as a market matures. Today, there are very few experts at virtual reality marketing. Ten years from now, there may be thousands of experts.
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