Advertising Agency Compensation (A&BM 04 Dec 2020)

Advertising Agency Compensation

Advertising Agency Fee Structures

Advertising agency fee structures represent a balance between the needs of clients who want to get the best return for their investment in advertising and agencies that must make a profit on the services they provide. Fee structures also reflect the range of services an agency offers. Some may provide only media advertising services; others may offer an integrated service that includes elements, such as direct marketing, public relations and sales promotion programs. There is pricing continuum of fee structures that reflects the diversity of agency services, according to the American Association of Advertising Agencies.

 

Commission

The traditional method of agency remuneration was a commission of 15 percent on the money a client spent in media, such as newspapers, magazines, radio and television. Media owners paid the commission and agencies used it to provide the services necessary to create and administer advertising campaigns. The advertiser paid the full amount of the media expenditure to the agency but did not incur any creative or administration charges. Any surplus made a contribution to agency running costs and profit. The commission-only model has become less popular since the 1990s, particularly for agencies handling the accounts of small businesses whose media expenditure may be small.

 

Service Fees

An alternative to the commission-only arrangement is a remuneration structure based on service fees. Agencies charge an hourly rate for time spent managing an account, creating advertisements, booking media and buying in services, such as photography, video production or market research. They also charge a handling fee, or markup, on the cost of services they buy in. A service fee structure reflects the actual work an agency carries out and is more suitable for accounts that incorporate a range of non-media services. At the end of an agreed period, the agency bills the client for all services provided during that time.

 

Project Fees

Agencies also offer clients the option of payment by project fee. The project fee might cover the time and costs of a specific campaign or all work completed during a specific period of time. The project fee represents a fixed cost, unlike the service fee, which varies with the amount of work carried out.

 

Combined Structures

Agencies may also offer a payment model that combines commission, fees and payment by results. A structure incorporating payment by results uses criteria, such as percentage increase in sales, number of leads generated or changes in awareness levels, to evaluate the performance of a campaign. Although payment by results represents value for money for clients, agencies may be reluctant to offer the facility as results can be affected by factors outside their control.