P&G has stripped out $1 billion in agency costs, and it’s not done yet

There has been no shortage of warnings suggesting a potentially untenable future for the traditional ad agency model, and P&G has been leading the way in terms of demanding fundamental changes.

This week, chief brand officer Marc Pritchard provided a revealing update on how it is transforming its approach to marketing, and his ideas could have massive implications for the agency world, particularly the large holding companies.

Speaking at Morgan Stanley’s Global Consumer & Retail Conference in New York, Pritchard indicated that major changes to its business model are just the beginning of P&G’s efforts to radically reinvent its go-to-market approach—made with an eye towards cutting costs without sacrificing any of its creative capabilities.

The actions at the world’s largest marketer provide a good indication of where the industry may go. Its recent moves have already reverberated across its roster agencies, and could radically reshape the industry should other major marketers decide to follow.

Pritchard suggested that agencies need to take stock of how they operate, much as P&G has done in recent years. “We had to disrupt ourselves in order to transform ourselves,” he said.

Among the steps P&G has taken are bringing more of its work (including creative and production) in-house, co-locating its own people alongside media, creative and production personnel in single integrated units (such as the Woven unit, which oversees the company’s fabric care division), reducing “annoying” ad frequency, and a continued shift from what Pritchard described as “mass blasting” to more personalized communication.

All of these efforts have instilled a new sense of creativity, agility and entrepreneurship within the company, while at the same time transforming the organization and its culture, said Pritchard.

None of this has come at the expense of its creative product, he insisted, highlighting recent work for brands like Pitera that included an original song by John Legend (“Oh Pitera,” below) and a campaign for Tide featuring NFL quarterback Peyton Manning and personalities from NBC properties including The Voice and Superstore.

“We’re on the edge of a great revolution in creativity, where we can imagine a world without ads as [we] know them today,” said Pritchard. This reinvention, he said, will directly impact its agency partnerships as it looks to move P&G from “brand people who outsource too much of their work, to brand entrepreneurs with their hands on the keyboard.”

P&G says it has stripped out about $1 billion in agency costs over the past five years, although Pritchard said there is “still a lot of runway” ahead as it looks to save on everything from production costs to agency fees and media expenditure.

The packaged goods giant has roughly halved the number of agencies it works with, from 6,000 to 3,000, and continues to shift its focus towards achieving exceptional creative output at the lowest possible cost.

“These steps established a solid foundation, and we’re now taking action to lead constructive disruption by reinventing brand building—from wasteful mass marketing to precision one-to-one brand building on a mass scale,” he said. “This is driving growth and delivering savings and efficiencies to reinvest for more growth and more profit.”

Among its most prominent initiatives is the rollout of its “fixed and flow” agency model, in which a fixed amount of work requiring experienced creative talent resides with a trusted partner, complemented by smaller, more agile agencies.

“We used to have a fixed relationship with one agency partner for many, many years that kind of stayed the same, but what we decided to do is retain a fixed partnership with an experienced creative team, with the ability to flow different types of creative shops in and out,” said Pritchard.

P&G is also getting better at developing effective creative for less. The women’s deodorant brand Secret, for example, no longer has an agency of record after cutting ties with Wieden & Kennedy earlier this year.

The opening for one of the brand’s recent spots was shot at P&G’s Cincinnati headquarters, with the brand director serving as producer and the brand manager serving as creative director. And the work is winning in market, said Pritchard, with Secret enjoying consistent mid single-digit sales growth.

Pritchard said that this new approach is allowing it to produce work for as little as one-tenth the cost and up to five times faster.

One of P&G’s biggest areas of focus has been media, where it continues to focus on cutting excess waste. He said that about 30% of the company’s US$7 billion media spend is now planned in-house, and suggested there are still savings that can be attained through a reduction in excess ad frequency, which he called “one of the biggest scourges” of the industry.

“There is still an enormous amount of waste in media,” he said. “We’re really working on driving that out to reinvest in driving more reach.” Many P&G brands are still reaching only 60% of their target audience, he said, citing U.S. set-top box data indicating that ads for its Tide brand alone were being delivered to the same household as many as 22 times a month.

P&G’s massive consumer database also lends itself to “advanced” programmatic media buying that finds people with the highest propensity to buy and reaches them without annoying ad frequency, said Pritchard. It is enabling the company to move away from what he described as “generic audiences” to “smart audiences,” using propriety algorithms to construct segments built around demographics and behavioural characteristics, such as those who purchased or sampled a product.

“We can reach many people with one-to-one precision,” he said, noting that Olay previously used that approach to reach 65 million “high potential” users in the U.S.—as opposed to a generic audience such as women 25-54—while spending 10% less.

China is the company’s most sophisticated market for this approach, he said, with more than 80% of digital media purchased in this manner. P&G reduced digital media waste in the market by 30%, he said, while increasing the number of people reached by 50%.


Chris Powell