The Ad Man Answers #34

Thursday + Gregory Huffstutter = The Ad Man Answers

Q: What commission is considered standard in print ad biz vs. the web ad biz vs. the radio ad biz?  Do some ad folks work entirely on commission?

-- JA Konrath, Chicago

A:   Nowadays, advertising agencies rarely work off the old “standard commission” model.

Standard commission used to be 15% of the total cost of the media buy.  So if a TV network, radio station, magazine, newspaper, or billboard company was charging $10,000 for a media schedule, they'd sell it to an accredited agency for $8,500, and that agency would keep the difference ($1,500) as their fee.

In advertising terms, the $10,000 media schedule would be called the “Gross” cost… and the $8,500 charge (after taking out the commission) would be called the “Net” fee.

This process is similar to how interior designers get discounts on home furnishings that are not available to the general public.  Media vendors are motivated to give this 15% commission to agencies because they’re the ones holding the purse strings on their clients’ ad budgets.  The more TV and radio stations play ball with the big agencies, the more future business might flow their way – sometimes from multiple accounts on the agency’s roster. 

But several things worked to destroy the old commission structure.  First, the advertising business became more competitive, with some agencies agreeing to take less than the standard commission to win new business.  For example, if it was a really big client, the agency might agree to only keep 11% of the commission, then rebate 4% to the client.

That led to agencies “unbundling” their departments in order to cut overhead.  So instead of “full-service” agencies – which offer creative work, account planning, media buying, commercial trafficking, and research under one roof – you started seeing companies specialize in one thing, like media buying.  Thus, purchasing advertising space became like shopping at Costco – where you generated more savings by buying in bulk. 

Meanwhile, a wave of mergers hit the advertising landscape, as large conglomerates bought up ailing shops in order to share resources (like back-room accounting), leverage media spending, and provide a Chinese menu of client services.  There are now 6 holding companies, like Omnicom, that control a large share of the global advertising and PR spending.

The fallout of all this unbundling and merging is that everyone now charges something different.  A client like Burger King might have a media buying agency that works for 2% of their gross media spending, while having a brand-planning consultant on retainer, then paying a flat annual fee to a separate creative boutique.

From a client’s perspective, the benefit to paying a flat agency fee instead of commission %:

• You’ll know in advance what you need to set aside for annual fees
• You don’t have to worry about your advertising agency overestimating media budgets just to beef up their fees

From a client’s perspective, the benefit to paying off commission % instead of a flat fee:

• It’s usually an invisible cost, since the agency fee is theoretically covered by the difference between the Gross and Net invoices
• If you end up trimming your advertising budget, your agency fees will decrease proportionally

From an agency’s perspective, the benefit to getting paid a flat agency fee instead of commission %:

• More stability in matching overhead vs. fixed revenue
• Can be more dispassionate when setting media spend levels with client, instead of constantly justifying recommendations and worrying about budget cuts

From an agency’s perspective, the benefit to getting paid off commission % instead of a flat fee:

• As media budgets rise, compensation increases… so you’re sharing in your client’s success

Internet is the one media form that came along after the old commission model.  So online media vendors generally work in NET and do not have commissionable rates.  To buy certain online banner ads, you don’t even need to hire an advertising agency, just fire up your computer and download free software. 

To sum up… if I’m a freelance media buyer, and I need to place one newspaper ad for my client, and I know in advance I will get paid a flat fee of $500 to do that job, the conversation might sound like this:

Me:  “So what’s the cost for a half-page, full-color ad in your Metro section?”

Newspaper: “$9,000.”

Me:  “Is that commissionable?”

Newspaper: “Yes.”

Me:  “Would you sell it to me for $8,200 instead?  I once got a beer coaster signed by James Patterson.  I could mail it to you.”

Newspaper:  “I love James Patterson!  You sure drive a tough bargain…  $8,200 it is.”

Me:  “So that’s $8,200 Gross, which translates to $6,970 Net.”  (less 15%)

Newspaper:  “Correct.  Would you like to get invoiced in Gross or Net?”

Me: “Net.” (because I’m getting paid on a flat fee instead of commission)

So the newspaper would send me a Net invoice for $6,970, which I would then add on $500 for my fee before sending a final bill to the client for $7,470... which is considerably cheaper than the $9,000 the client might've been charged if they'd tried placing the ad on their own.

And that’s how advertising gets negotiated.  Once signed beer coaster at a time.

 

Gregory Huffstutter has been punching Ad Agency timecards for the past decade, working on accounts like McDonald's, KIA Motors, and the San Diego Padres. He recently finished his first mystery, KATZ CRADLE and is currently on submission. The first 100 pages of his novel are linked here. For general advertising questions, leave a comment or send e-mail to katz @ gregoryhuffstutter dot com with 'Ask The Ad Man' in the subject line.

Comments

[Bruce Kersten]

I think the 15% could still work fine if people didn't fool with it so much. Recently my company had the opportunity to work for several car dealerships that wanted to split the agency commission. In other words we would have gotten 7.5% It just wasn't worth it to us due to the nature of that business. I think the other factor is how to charge fees for a clients Pay Per Click Campaigns. Should they be subject to a 15% markup or just fee based?

[gregory huffstutter]

What's funny is that when you add up all the fees that a client may pay to their various agencies, it often winds up close to 15% of their media spend anyway.

The size of the media spend really determins how flexible you can be as an agency. If it's someone like Toyota, which spends hundreds of millions a year, then 2% of that can be enough to staff an army of workers.

But for smaller accounts, 15% is a good guideline. And if you're not able to make that work when the client wants to split up the commission %s, then going to a flat fee is probably best.

Same with internet. Figure out what you need to make it worth your while, and make that your fee. That way it's transparent to the client, and your compensation isn't tied to the click-thru whims of internet surfers.