Advertising Agency Compensation
Advertising firms earn money via commissions and fees. It has been standard practise for full-service agencies to charge a commission of 15% on all services invoiced, plus compensation for any expenses associated with producing advertisements. The medium that a client company’s advertisements are put in get a 15% commission, not the client firm itself.
The whole cost of the media advertising space used is invoiced to the advertiser by its agency. Then, the media charge the agency the entire cost of the spot, or else a 15% commission (any early payment discount is passed back to the client). Therefore, the agency’s income is essentially comprised of the difference between the sums it invoices customers for and the sums it pays to media.
Through a decrease in its invoicing to the agency, the media effectively pays the agency a 15% commission. Additionally, this 15% commission must pay for the majority of the agency’s operational costs to ensure that a customer is paying for the complete range of services.
In contrast, boutiques charge a flat price rather than a commission for their services. The shift to a fee-based structure will alter the client-agency relationship in the client’s favour since marketers will be better able to purchase just the services they need from agencies.
The commission approach and the fee method are the two main ways to compensate advertising companies. An agency often earns a commission payment equivalent to 15% of the price of the media time or space. The advertiser pays the full fee to the agency; the commission is paid by the media, who charge the agencies the advertised amount, minus 15%.
Thus, the media will charge the agency Rs. 34,000 if an agency produces and inserts an advertising in a magazine worth Rs (Rs. 40,000 less 15 per cent). The agency then charges the customer the entire amount of Rs. 40,000. The 6,000 rupees that the agency receives go toward providing its services.
The majority of merchants have direct agreements and cheaper fees with regional media. On these prices, no agency commission is given. A local advertiser often pays a fee to utilise an agency.
There has been significant discontent with the straight commission arrangement for a long time. The agencies’ profitability fell as a result of being compelled by competition to provide an increasing number of services without extra payment. Target marketers believed they were overpaying after purchasing a lot of advertising time and space.
The agencies were paid equally whether they ran the same commercial in 10 different publications or incurred additional costs to produce ten separate advertisements.
Although the straight commission technique is probably still the most popular, there is a clear trend today toward the usage of the fee method, or a mix of the commission and fee methods.
It can seem odd how an advertising agency’s size is determined. The size of the advertising agency is determined by its “billings” number, while the size of the majority of corporate organisations is indicated by their sales volume. The revenue or income of the agency is not the same as this billings amount.
A company with Rs. 1,000,000 in billings really makes around Rs. 150,000 per year. The second amount implies that the agency has only received commission payments of 15% and has not received any additional “fee” revenue. The cost of the time or space that the media charges for when advertisements are placed via the agency is known as the billings’ figure.
As a result, an agency with Rs. 1,000,000 in billings purchases time and space for its clients for Rs. 1,000,000 from the media.
Be aware that the agency in Fig. has acquired space with a gross value of Rs. 50,000 on behalf of its customer. Let’s assume for the sake of example that the acquired space is a full-page, four-color advertisement in a nationally distributed, broad appeal magazine.
Note that the customer pays Rs. 50,000 to the agency, while the agency sends Rs. 42,500 to the car. The agency’s billing size would be Rs. 50,000 if it had not placed any more work and had no “fee basis” revenue (such as research contracts).
The agency’s revenue would be 7,500 rupees, or 15% of 50,000 rupees. Although this example may be oversimplified, it shows the fundamental connection between customers and midsize agencies. The medium’s practise of providing monetary discounts is a problematic element.
