Today's advertising agencies are compensated differently, and with more variability, than in the past.
Just as advertising methods and outlets have changed in recent years, so have the ways advertising agencies get paid. While the fees charged by lawyers, accountants and other types of business consultants are generally tied to a fixed hourly rate, agencies may be compensated on the basis of commissions, markups, fees or pay-for-results plans. Clients can also negotiate some combination of these payment structures.
Commissions
For many years, the standard agency compensation was 15 percent of the total amount spent by the client on mass media such as television, radio, magazines and newspapers. For example, if Best Cookie Brands bought $1 million worth of airtime on TV, its agency would remit $850,000 to the network and keep $150,000 as payment for creating and placing the ads.
More recently, the commission system has evolved to reflect the changing media landscape. Many new media -- and increasingly popular promotion alternatives, such as database marketing -- do not pay a 15 percent agency commission. Some pay no commission at all. So Best Cookie Brands probably negotiates the percentage it pays in commissions, and relies in part on other compensation options.
Markups
In the course of preparing advertisements, agencies routinely contract with outside vendors such as photographers, printers, researchers and film directors. To reflect the work involved in recruiting and managing these specialists, the agency typically adds a markup to their charges. Generally, this markup ranges from 17.65 percent to 20 percent, depending on the nature of the outside services.
Fee System
Currently, there are two common types of fee systems. One is based on an hourly rate, which may be the same for all agency services or different across specialties and departments. The second type is a fixed, project-based fee negotiated by the client and agency to cover specific services and expenses during a set period of time.
Pay-for-Results Plans
These newest payment structures base an agency's compensation on the effectiveness of its work. Specific measurement criteria must be agreed upon in advance. Agencies often resist pay-for-results plans tied primarily to sales, because they cannot control key sales-related factors like product quality or distribution strategy. But a growing number of agencies are agreeing to be compensated based on brand awareness or other communications goals.
Looking Ahead
Advertising agencies are in transition, increasingly offering services traditionally defined as sales promotion or public relations. At the same time, they are learning use -- and get paid for -- the vast new array of digital communications options. This period of change is likely to benefit their clients, who will have more flexibility than ever in negotiating fee levels and structures.
Tags: agencies compensated, agency compensation, Best Cookie, Best Cookie Brands, Cookie Brands, hourly rate