Advertising agencies are paid via fees and commissions. In addition to the payment for advertising production expenses, full-service agencies sometimes charge a commission of fifteen percent of the total billings for their services. The media that runs advertisements for a client business is the source of the 15 percent fee, not the firm.
The whole cost of the media space utilised for advertising is billed to the advertiser by their agency. Subsequently, the medium levies full advertising costs on the agency, with the possibility of a fifteen percent fee (any early payment discount is passed back to the client). As a result, the agency’s main source of income is the difference between what it charges the media and what it charges customers.
- By lowering their invoice to the agency, the media are essentially paying a fifteen percent charge to the agency. Since the majority of the agency’s running costs are covered by this 15 percent charge, clients are really paying for the full range of services.
- Conversely, boutiques bill a price for the services they provide rather than accepting commission. The shift to a fee-based approach will benefit clients since it will alter the agency-client relationship and let them pay for just the services they need.
- Advertising companies primarily accept money via commission and fee systems. An agency is typically paid fifteen percent of the cost of the media time or space under a standard commission agreement. The advertiser pays the agency the full amount, and the media deducts fifteen percent from the agreed-upon charge to cover the commission.
- Therefore, the media will charge the agency Rs. 34,000 if the agency generates and inserts an advertising in a magazine worth at Rs. 40,000. (Rs. 40,000 less 15 per cent). Subsequently, the agency charges the customer the whole amount of Rs. 40,000. The agency uses this Rs. 6,000 revenue to pay for its services.
- The majority of retailers pay cheaper fees and deal directly with the local media. On these prices, there is no agency commission. Local advertising often pays an agency fee for their services.
For a long time, a lot of people have been unhappy with the straight commission system. Because of the competition, the agencies had to provide more services for the same money, which hurt their bottom line. Target Advertising believed they were overpaying for a lot of media time and space that they had to buy.
Whether the agencies created 10 new advertisements or just ran the same advertisement in ten different publications, they were paid the same. Even while the pure commission strategy is still likely the most regularly employed, there is a notable trend these days toward the usage of the fee method, or a mix of the commission and fee strategies.
There is a unique way to figure out how big an advertising agency is. The size of the advertising agency is determined by its “billings” number, even though the majority of corporate organisations are evaluated mostly based on sales volume. The quantity of billings does not correspond to 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 will not get any further “fee” money after fifteen percent commission payments. The amount that the media charges for the time or space that their agency posts advertisements is known as the billings figure.
Thus, an agency charging one million rupees buys time and space for its clients at a media price of one million rupees. Fig. provides an example of this link between agency commissions and billings.
- Take note that the agency shown in Fig. has paid Rs. 50,000 to acquire space for its customer. Let’s assume, for the sake of illustration, that the space secured is a full-page, four-color advertisement in a wide appeal magazine distributed throughout the country.
- Be informed that the client gives Rs. 50,000 to the car and pays Rs. 42,500 to the agency. The agency’s billing amount would be Rs. 50,000 in the event that it received no more job placements or “fee basis” funding. (such as contracts for research).
- That would mean that the agency would make Rs. 7,500, or 15% of Rs. 50,000. Despite its potential simplicity, this graphic captures the essence of the client-medium agency connection. An further layer of complexity is introduced by the financial discounts offered by the medium.