Many companies or businesses don’t have the expertise to excel in every field of business. Therefore, they sometimes outsource their tasks or processes to other companies that have expertise in that field. Through this, both companies benefit. This relationship between both of them gives rise to an agency relationship.
What is an Agency-Based business model?
The agency-based business model is for companies that act as agents of another. Usually, the company using this business model has expertise in a particular field.
By utilizing its expertise, the company offers other businesses the ability to use its services and outsource processes. Through this, the company becomes an agent of its client and earns money.
The agent company charges the business in exchange for providing services. The client company gets the agent’s services, effectively outsourcing its processes.
By acting as the client’s agent, the agent company works in the client’s best interests. Therefore, the agency-based business model, while profitable, is also mutually beneficial.
The agency-based business model has existed for a long time. In this business model, the client is the principal, while the agency company is the agent. Both companies enter into an agreement that officiates their dealings. There are various fields in which agents and a principal-agent relationship may exist.
How does the Agency-based business model work?
The agency-based business model works by establishing a ‘principal’ company first. The principal company is the business that needs to outsource its processes or operations to another company. There are different reasons why a company may want to do so. For example, outsourcing allows them to obtain expertise or cheaper services.
Sometimes, companies may not want to invest in dedicated departments for specific processes. Therefore, outsourcing may also be an option for them.
The second party in the agency-based business model is the agent company. The agent company is a business that uses the agency-based business model. The agent works on behalf of the client or principal company and takes care of their business. In exchange, the agency charges the client for the services it provides.
The primary source of revenue in this business model is the principal company. The agent fulfills tasks in the client’s interest in exchange for a fee or commission. Some of these tasks may be homogenous.
However, most of the time, the services provided by agency companies are unique and specific to each client. Therefore, it allows the agency to charge more for specialized help.
As mentioned, there are various types of agencies that may exist. For example, companies use marketing agencies for their digital, direct, or social media marketing needs. Similarly, some principal companies obtain help from advertising agencies for their promotional needs.
What are the advantages and disadvantages of the Agency-based business model?
The agency-based business model comes with its benefits and drawbacks. Some of its primary advantages and disadvantages are below.
Advantages
The agency-based business model helps create companies that offer specialized services. Since these companies have expertise in their respective fields, they can provide clients with much better prices than if they had dedicated departments. Therefore, the cost advantages that they provide clients are a great advantage.
Agencies are also a great way for companies to outsource their processes. Similarly, the services these agency-based companies provide their clients can apply to a wide range of industries. Therefore, agency companies can attract a significant number of clients from various industries.
The agency-based business model also allows clients to find agents with local experience. For companies planning to expand, using agents is a great way to cater to local customers’ needs.
Disadvantages
The agency-based model comes with some disadvantages from outsourcing as well. For example, when companies use agents instead of completing a process themselves, they may lose control over it. It’s also difficult to regulate the agent’s activities, which also results in loss of control.
The most crucial disadvantage of this business model is the conflict of interest. Sometimes, agents may have to deal with situations where their interests clash with those of their clients. In these situations, the agents may end up acting in their own self-interest. It can result in a loss of reputation while also causing harm to the client.
Examples
Some of the well-known companies that use the agency-based business model come from the marketing and advertising industries. Ogilvy, BBDO, and Havas are some reputed companies in the marketing sector. On the other hand, companies like REQ, SmartSites, and Daniel Brian Advertising make the top names in the advertising industry.
Conclusion
The agency-based business model comes due to the principal-agent relationship. Agent companies are businesses that complete tasks on behalf of a principal company.
The agent charges the client in exchange for completing those tasks. Clients use agencies to outsource their processes to obtain expert services.