Advertising Agency: Compensation
Advertising companies get their money via fees and commissions. In addition to payment for advertising production expenses, full-service agencies often charge a commission of fifteen percent of total billings for their services. The medium that places advertising for a client company is the source of the 15% fee, not the business itself.
The whole cost of the media space utilised for advertising is invoiced to the advertiser by its agency. The media then bills the agency for the whole cost of the spot, with the possibility of a 15% commission (any early payment discount is passed back to the client). Therefore, the main source of income for the agency is the difference between what it charges customers and what it pays the media.
By lowering their invoice to the agency, the media are essentially giving the agency a fifteen percent commission. Furthermore, the majority of the agency’s running costs must be covered by this 15% commission, meaning that clients are really paying for the complete range of services.
Conversely, boutiques charge a price for the services they provide rather than a commission. The shift to a fee-based model will benefit clients by reshaping the agency-client relationship to enable them to purchase just the services they need from agencies.
The commission and fee systems are the two main ways that advertising companies get compensated. An agency gets paid fifteen percent of the price of the media time or space under a standard commission arrangement. The advertiser pays the agency the full amount; the media pays the commission by billing the agencies for the specified rate minus 15%.
Therefore, the media will charge the agency Rs. 34,000 if the agency produces and inserts an advertising in a magazine worth Rs. 40,000. (Rs. 40,000 less 15 per cent). The customer is then billed by the agency for the whole amount of Rs. 40,000. The agency provides its services using this Rs. 6,000 revenue.
The majority of shops pay lesser fees and deal directly with the local media. On these prices, no agency commission is given. Local advertisers often pay an agency charge for their services.
There has been a great deal of discontent with the straight commission arrangement for a long time. The agencies’ profitability decreased as a result of competition forcing them to provide an increasing number of services for no extra pay. Target advertising believed they were overpaying as they purchased a lot of media time and space.
Whether the agencies spent additional money to create 10 new advertisements or just ran the same advertising in ten different publications, they were paid the same.
Though the straight commission technique is still likely the most popular, there is a clear trend nowadays toward the usage of the fee method, or a mix of the commission and fee methods.
There is an odd technique of measuring the size of an advertising firm. The size of the advertising agency is determined by its “billings” number, while the majority of corporate organisations are measured based on their sales volume. The amount of billings does not equal the agency’s revenue or income.
An organisation that bills for one lakh rupees really makes around fifteen thousand rupees a year. This latter amount is based on the assumption that the agency has received commission payments of 15% and has not received any further “fee” revenue. The amount that the media charges for the time or space where advertisements are placed via the agency is known as the billings figure.
As a result, an agency charging for one million rupees purchases time and space for its clients at a media price of one million rupees. This link between agency commissions and billings is made clear by an example
Observe that the agency has procured space valued at Rs. 50,000 on behalf of its customer. Let’s assume, for the sake of example, that the space acquired is a full-page, four-color advertisement in a broad appeal magazine that is distributed nationwide.
Take note that the agency receives Rs. 42,500 from the customer and Rs. 50,000 from the client sent to the car. The agency’s billing amount would be Rs. 50,000 in the absence of any additional employment placements and “fee basis” revenue (like research contracts).
The agency would make Rs. 7,500, or 15% of Rs. 50,000, in revenue. Although this picture may be oversimplified, it captures the essence of the client-medium agency connection. One additional layer of complexity is the monetary discounts offered by the medium