Middle market advertising and marketing firms must become integrated solution providers as customers demand capabilities beyond the traditional norms. The days of a firm focusing solely on advertising- or marketing-specific services are gone.

We’ve said it time and again, but labor costs continue to rise without a convergence of labor productivity, as shown in the table below.

As long as this continues, companies will look for ways to optimize their resources, primarily through technological investments. According to IBISWorld, growth in digital marketing has increased the need for advertising services, as all sectors are looking to benefit from new techniques such as programmatic ad buying, viral marketing and connected-TV expenditures. All of these are tracking technology tools that enable advertisers to focus marketing and advertising campaigns on consumers more efficiently.

The various services outlined above ultimately rely on a company’s advertising and marketing budget, which directly affects the revenue that firms operating in this industry will see. According to Bloomberg, marketing and advertising companies have seen organic sales growth align closely with real gross domestic product over the past five years as outlined in the table below. Magna Global, a major ad forecaster, recently predicted that U.S. advertising spending in 2023 will grow by 5.2%. While down from 7% growth rate in 2022, this is still an increase over multiple projections earlier in 2023, which were dampened by the uncertain economic environment.

We’ve noted previously that advertising firms must embrace digital transformation to keep up, and the same can be said for marketing firms, particularly those in the middle market. We’re seeing new capabilities to generate sales that are less connected to consumer spending. This will allow middle market advertising and marketing firms to accelerate and sustain their growth. These capabilities include:

• Data-driven and technology-focused services, which may not be closely tied to overall economic conditions, as customers go through their own digital transformations.
• An overall wider range of services, including those outside of the traditional fields in which these companies have operated. 

The major players in the industry—the public companies that perform both marketing and advertising—have been operating in this ecosystem for some time. Most of these firms have not considered themselves solely advertising agents or marketing consultants, but rather a true one-stop shop for their customers.

We continue to see a bigger emphasis on the nontraditional parts of the business—particularly in the business transformation and systems integration space—to boost the bottom line. This has been expedited primarily through acquisitions, allowing these companies to expand their capability offerings more quickly and efficiently.

This puts middle market firms at risk of losing market share, as a number of these major players have indicated their goal is to grow this part of the business into nearly half of their revenue stream. Furthermore, not only does the middle market face the threat of these major players stepping into its arena, but now a number of technology giants have entered the marketing and advertising space. These tech companies are primarily those that have gone through a significant digital transformation of their own, and they now are bringing their solutions to all industries—marketing and advertising included.