For those who notice, I haven’t been writing much lately. I have spent considered amount of time exploring the reasons why an investor should invest or a business owner would set up an Online agency.

The Online world is changing too fast, way too fast from both technology front and the way new technology is being adopted/used by millions of people worldwide.

What i am after are answers to the following questions:

• Why would institution investors/big network invest or set up offices to provide Online Marketing services to advertisers?
• What is/are the potential returns from an Online Marketing agency compared to old money like commodity products, oil & gas etc…
• What makes an Online Agency unique? and how can it keep its clients from changing to another agency?
• Which form of Online market service is most profitable? is it Search Engine Marketing (paid Search or Search engine optimization) or Display Media (whether it is arbitrage or being an actual media owner) or technology provider (Omniture/DoubleClick) or search engine/service provider themselves (Google/Yahoo/Twitter/Facebook etc…)
• How to actually make a profit out of the service provided? Well being able to provide good service to client is not enough, agencies/companies obviously need to have a working model to be able to churn out profit from those sales

If there is a unanimous conclusion with regards to which company/service will do best in the long run, should we all put money or work for that company or trying to provide that service?
Clearly the answer is No to the question above. We haven’t YET reached the unanimous verdict on which company/service will be the most profitable in the long run. And if we haven’t been able to make that decision in the past 10-20 years since the popularity of the internet, what then gives us the confidence that we will be able to make the decision now or in the next 5 years?

Is it because of the inherent nature of the fast changing Online world? Are we trying to predict the unpredictable?

• Microsoft recently introduced Bing and it has been receiving quite a lot of attention, more good critics than bad. But can Bing challenges Google from a consumer standpoint and agency standpoint?
• How about Social Media Optimization (SMO), Mobile Marketing, Online Consultancy Services?

If i apply Phil Fisher, Warren Buffett, Charlie Munger, John Burr Williams, Robert G. Hagstrom teachings then i should only follow:

• Online services/technologies that i understand.
• Look for company with consistent operating history, managed by capable managers with strong integrity
• Evaluate to see if the company has “durable” long term edge. What is an Online agency “moat”?

Or are we approaching the problem at hand from the wrong angle? Stop trying to predict where the industry as a whole is going but rather focus on individual company/niche vertical?
Will looking at top 10 agencies/companies in any 10 years duration help? Top 10 in 1970s, 1980s, 1990s and 2000s?

Ok sorry for jumping around, i tend to do that a lot…

Back to “What makes an Online agency unique”

First let’s start with why i want to answer this question?
It’s because it matters in the long run regarding:

• How you decide which Online niche you want to work in?
• Which company to work for?
• If you want to start your own firm, what services to go into?
• If you want to invest your money, which network should you explore? or you’d better off invest in other industries (old money) or invest in service provider/Media owner (Google/Yahoo)
• and well it’s fun for me to try to answer these questions

I recently contributed an article “How to Choose an SEM agency” to iMediaConnection, in which i put a great emphasis on Human Resource (Staff turnover rate to be specific)
Then i wrote another piece on this blog titled “Challenges of Running a SEM firm in South East and North Asia“, in which i briefly touched on the gross profit difference generated from Paid Search and SEO activities.

I think there can be a lot of factors that make an agency unique (being a survival in the long run):

• The breadth of clientele? No doubt it’s one very important factor.

Being able to keep existing clients (this will largely be the job of account managers and operation/production team) and bringing new clients (the strength of sales team). However, the current trend with household brands is consolidation, budget cut and low profit margin for agencies.

Should an agency then focus on the long tail and services hundreds of smaller SMEs? The hopefully increasing size of clients is part of the “moat”

• Expanding to services with higher profit margin to avoid commoditization?

It, however, takes time to build a team to be able to offer a particular Online market service properly. In the mean time agency needs to demonstrate to clients that this new service can actually be a more cost effective solution to reach the client’s objective/target audience.

Also which service? There are so many of them….

• Expanding to hot, buzz technologies/services? Social media optimization, online reputation management, mobile marketing/targeting

• Having the most talented, respected team? It’s not easy to find and keep a group of talented team members working together in harmony though.

Company culture definitely comes to play here and older/more established agencies may have an edge if they have good culture to begin with.

• Focusing on operating profitability by streamlining processes, cutting cost?

Long term i guess the bulk of an agency cost will be employee salary/executive remuneration
Working process/model is not easy to build either because it’s different from region to region. It again takes leadership/time to at least customize a successful working model to a particular region. APJ for me presents great challenges because of the inherent diversity

• Competition/copycat: there is little doubt that whatever makes an agency unique short term will be copied/tried to copy from other agencies. It’s no difference from any other industries where products are being copied, talented executive being “stolen”…

So the trick is really to find an edge, a fundamental comparative advantage that can last long term, being the leader in something worthwhile.

I personally haven’t found answers to many of the questions above yet. This is, by no small portion, the result of my lack of clarity in questions that i raise.
I, however, firmly believe that our industry is a people business.

Alrighty, enough “nonsense” from me… if you have anything to share, as always you are welcome to email me at chandlerblog@gmail.com

Have a nice weekend everyone
Chandler
P.S: There are approximately one billion people who need food on our planet so it’s truly a privilege for me to wake up early on a Saturday morning, enjoying a cup of Vietnamese coffee and mumble about these stuff

Ok this question is tough to answer… and I know that instead of thinking about challenges, one should think about opportunities or solutions for those challenges…
Well I am (and always be) a student of life so I don’t think I am qualified enough to talk about solutions yet.

Besides I am sure there are many challenges and I won’t be able to cover them all so feel free to join in through emailing me at chandlerblog@gmail.com

Southeast Asia and North Asia is a diverse region

It is known that we are diverse in terms of local languages, in different stages of economic/online infrastructure development. We have countries like Myanmar who are still under military regime, Thailand with political unrest since 2003-2004.

One practical example is each country has its own currency. Since the economic crisis started, the exchange rates between different currencies have been fluctuating a lot. If you are running regional campaigns in KRW, HKD, JPY, NTD with Yahoo (Yahoo only accepts local currency) in KR, HK, JP and Taiwan, but the contract you have with your client is in USD and you pay all corporate expense in SGD then you are exposed to exchange rate and it can be severe.

The agency can’t run away from not using Yahoo either since Yahoo (and its partners) is the more popular search engine network in those countries
well I guess every regional company face this problem. However, the point here is that if you just operate in North America, Europe or AU, you won’t have to.

As for different local languages, this region present a unique challenge compared to other regions as well: an agency must have native speaking employees in order to do the job well. Ad copies, keywords, meta title, link building etc… All need to be done in local languages.

Different working cultures, business cultures make managing expectation much more difficult i.e. people in HK for example are working extremely long hours compared to some other countries (I won’t name which one to avoid any offenses) so turn around time for them is much shorter.

In addition, different search engine teams in the region have different work process/procedure or SLAs (Service Level Agreement) as well: (hey even with the same search engine, different teams like SG vs. HK vs. JP are different) request for proposals, payment term, credit limit, internal policy regarding account transfer etc… are all different.

Even for Google, who has the most convenient platform for managing PPC campaign, have some country specific issues. For example, if an existing account was opened directly with Google KR, using KRW to pay for the media spend then a new agency outside of KR has no way to take over that account. What I mean by that is the agency will have to create a mirror account and start from scratch since:

• They don’t have physical address in KR and Google KR does not allow a company outside of KR to pay in KRW.
• In order to pay in KRW to Google, a company must have a physical billing address in KR.

Starting a new account from scratch means all historical data, quality score etc.. are all gone. Not only that the average CPC of the new account will be likely to be higher than the existing one for a while until it accumulates enough clicks and have high quality score again and so forth.

Well, I am not trying to complain how nice/easy life the agencies in US, Europe or AU have compared to this region (hell I know they face stiff competition, laser thin profit margin etc.. as well). Yet they don’t have so much issue with regards to diversification like us I supposed.

Total Revenue and Operating margin

SEM includes both Pay per Click (or Paid Search) and SEO (Search Engine Optimization).
However, the cost model for PPC and SEO are totally different.

Pay per Click margin

Most agencies charge clients account management fee as a percentage of media spend. (I know there are other cost models like CPA-Cost per Acquisition, CPL-Cost per Lead, etc… however they are not popular yet).
This percentage, in most cases, ranges from 4-5% to 20%. This is NET Gross Profit by the way since most search engines no longer offer rebate unless you are a reseller.

For example, let say the search spend is $100, then the gross GP to an agency ranges from $4-$5 to $20.

One could ask a couple of questions at this point:

• Why the wide percentage range?
There are many reasons for this.

For example, in certain territories, the understanding about Paid Search is quite limited. Traditional creative/media agencies use search only when there is some money left over on the table so they just charge the client a very small percentage of account management since the budget is so small for them and they don’t make money there anyway.

This has been going on for a while and created the wrong perception from the client side. (Hell, I would think that some guy is trying to rip me off as well if normally I only pay 4% fee and now they want me to pay 10% or more!)

However, we know how complicated Search Engine Marketing can be and it’s really hard work! 4-5% is simply not enough for any decent SEM agencies to cover off all of their operating expenses.
For most cases, if agency only charges 4-5% management fee, that means the client receive a “4-5% level of service”. I know it’s ugly to say it but it’s true and I come across campaigns like this.
I am not going to give a straight forward numerical example because I believe it’s very easy to see what 4-5% out of say US $15k equals to.
When the monthly budget is around US $1 mil or something then it’s a different story. However, even at that level, 4-5% is just too little but well many clients are used to this level of management fee in certain territories.

On the other side of the scale are those with 20% management fee. It would be wrong to generalize and say that it’s too high or too low. Search Engine Marketing is a professional service so hiring a SEM agency is just like hiring a lawyer. Depending on individual needs, the values the lawyer can bring to the table, the fee will be different.
This is not the main point I want to bring across those. It’s the second question below.

• Is the Gross GP low or high?

Frankly speaking, I think for an agency that provides only Paid Search service, their operating margin will be very small as a percentage. It seems smaller providing this is new Media, the internet where other firms in other industries are having much higher operating margins.

Coupling with the low budget allocated to search as a percentage in the whole marketing mix, Paid Search agencies will have a tough time.

Search Engine Optimization margin

It’s proven that Paid Search and SEO needs to work together to provide best results. You would want to “diet and exercise at the same time to keep your body healthy” (I learnt this example from my boss).
Yet, the adoption rate for SEO is still very low in this region. It’s partly because of the fact that Paid Search can provide immediate results while SEO is changing all the time and most clients don’t know how to define KPIs for SEO projects.

Having said that SEO will provide better profit margin for agencies and allow them to function as normal businesses. Until that happens most pure SEM agencies in the region will struggle to make ends meet or produce less than satisfactory results from an investor point of view.
Why do I have to invest in a company that produce only less than 4-5% operating margin (let alone earning percentage) when I can invest in other companies that yield much better return?

It’s challenging to look at a business plan, understand where all the cost, profit are and realize a complete different picture for a pure SEM agencies.

For this post, i focus solely on the commercial challenges for a SEM firm in the region, not mentioning about human resource issue, the long client education journey etc…

My hope is that we (the industry as a whole) won’t follow the footstep of airline industry in which the volume of traffic is increasing leaps and bounds but not many airlines are making money.
Of course at the end of the days, agencies can ONLY make money long term if they in turn provide good services to their clients and help their clients make money…

Ok that’s all from me for now. I am going to a friend house to enjoy some authentic Vietnamese food now! Yay

Cheers and have a nice weekend everyone!
Chandler
P.S: I pressed the “Publish post” by accident while i was still half way through this post so some of you may receive the wrong version of this article. I am very sorry for that. Accident happens sometimes!