Traditional media companies are scrambling to build “digital agencies” — essentially in house groups that build all digital packages for SMBs, franchisees and national advertisers. The area is so hot that a two-day conference at a Chicago airport hotel last week focused on nothing but defining what is a digital agency, how to build one and what to sell.

Two leading BIA/Kelsey analysts kicked off the Digital Agency Summit in Chicago with a keynote dense with data and case studies underscoring the whys and hows of the digital agency business. BIA/Kelsey partnered with the Local Media Association to present the summit.

“Digital agencies are hot,” Ducey declared. The real question is, Why?

Simply put, small-business clients’ needs changing, and they are getting more digitally savvy. The digital agency model, at least in theory, allows companies to deliver a more sophisticated and complex digital product set, as well as the consultative approach required to sell these products effectively. Of course, margins are a key consideration, given that many of the products in the agency bundle are resold.

A slide from BIA/Kelsey’s keynote at last week’s Digital Agency Summit in Chicago details the product set that many digital agencies are offering their clients.

The top-line opportunity is clear, however. Ducey noted that local digital media will be a $45 billion business by 2017. Driving that growth is a spending shift, from traditional media to digital, as well as within digital, with more emphasis on mobile and social media, as well as digital services like presence and reputation management.

For now at least, the agency model requires direct sales, more than likely face to face rather than telesales, though both are being used.

“Local is sold, not bought,” Ducey said. “We would all love it if sales were automated, but we are not there yet, and we may never get there entirely.” This point was underscored with data from BIA/Kelsey’s Local Commerce Monitor showing the majority of SMB prefer to deal with a premise (outside) sales rep.

BIA/Kelsey Managing Director Rick Ducey and VP Consulting Jed Williams gave the keynote at last week’s Digital Agency Summit in Chicago.

To illustrate how digital agencies are constructed, Williams offered brief case studies of several digital agencies, three of which are housed within newspaper organizations, appropriate for an audience predominately composed of newspaper publishers.

LocalEdge Media is a digital agency operated by Hearst that sells direct and also operates through reseller partners. Local Edge offers 15 core products through 94 bundling variations in 117 local markets. It’s packages start at $395/month. Fulfillment is a big emphasis for Hearts, with 380 people on staff to handle delivery of the product packages Local Edge sells to SMBs.

GannettLocal (now G/O Digital) is Gannett’s agency offering. In contrast to Hearst’s broad-based, longer tail model, Gannett has chosen to focus on five key verticals, and only deal with accounts that spend upwards of $1,000 per month, with most spending north of $2,500. Gannett is clearly focused on margins, chosing profitable verticals like financial services and automotive, and eschewing the rest.

Propel Marketing is GateHouse Media’s foray into agencies. Propel is long-tail, SMB focused, offering digital packages that start as low as $140 per month. It’s secret sauce involves understanding the customer lifecycle, and mapping solutions against the prospect’s place on the lifecycle.

Williams ended with a vertical case study. AutoTrader is in essence a digital agency for the automotive space. The company has been delivering on that promise of a fully integrated agency offer by adding more engagement marketing capabilities to its suite. AutoTrader beefed up its SEM capabilities with its acquisition of Haystak, for example.

Williams cautioned that any traditional media company that dives into the agency business will face an expanded competitive set, including both vertical (Auto Trader) and horizontal (Yodle, ReachLocal) players that have been at the agency game for a while.

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Building a digital agency involves a lot of heavy lifting — making the right hires, structuring the right organization, building the capabilities to fulfill programs and measure their success. This morning at the Digital Agency Summit in Chicago, seasoned agency vets broke down the details on how to build a digital agency. BIA/Kelsey is partnering with the Local Media Association in presenting the summit.

First up was Greg Walls, VP, reseller channel at Local Edge. LocalEdge is the digital agency within newspaper publisher Hearst Corp. Local Edge is the legacy of Hearst’s acquisition of the independent Yellow Pages publisher White Directory. Local Edge still publishes some print, but has shifted its emphasis to the digital agency business. White works with a lot of newspapers who resell the Local Edge digital agency services, including most recently Fairfax Digital in Australia. Local Edge is all about selling digital bundles. Walls offered several tactical tips for hiring and training digital agency salespeople.

“Assume 50% of each [sales recruit] class will turn over within six to seven months. Set classes up accordingly,” Walls says.

If this isn’t handled well, an agency risks falling short of revenue targets as they scramble to replace lost sales people. One key is to set up another training class six months into the previous classes tenure.

Walls offered three possible approaches to initial training. The first involves a solid two-week captive training program, the first week devoted to product training, and the second week is about how to sell, specifically how to sell a digital bundle.

The second approach is called gap training, and covers a three to four week span. The first weeks is all about product training, with some preliminary sales training. Then the rep is sent out to sell, make mistakes and learn from them. The final one or two weeks are about training to fill the gaps in sales skill that week two revealed.

The third approach involved how to train a partner’s existing sales force, which after all touches most of the company’s revenue. “We need to get them training, but no one wants to pull them out of the field,” Walls said.

His approach is to train legacy reps gradually by pulling them out of the field in half-day increments.

The other piece, Walls said, is that you have to hold legacy reps accountable for selling digital.

“Otherwise, rules without consequences is merely advice,” Walls said.

Next, Chris Lee, President, Deseret Digital Media, gave a primer on the economics of digital agencies. He made the case for using a digital agency as a source of new sales for higher-margin owned and operated inventory.

Utah-based Deseret has five different digital only sales channels. The company no longer has legacy seller carrying digital products.

As Lee noted, margins for a media company (selling mostly owned and operated inventory) are much better than those of an agency (which largely resells other’s products).

Agency economics involve 20%-40% gross margin products, not 80%-90%, Lee said. This is substantially different than the publishing business. Different business, different economics. As a result agencies need to compensate their sales people differently, with commissions based on margin rather than revenue.

Lee pointed to two scenarios that allow a digital agency to make money. One is that it drives very high sales volume. The other is that it facilitates upsell to higher margin owned and operated media.

“Nothing else will drive success,” Lee said.

Deseret’s strategy is to leverage the agency to drive higher margin sales on Deseret’s owned and operated digital properties.

“We must move to our owned and operated media,” Lee said. “And to do that we need to focus on audience development. We won’t make money just doing agency in my opinion.”

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