Way back when the advertising industry started, N.W. Ayer and Son opened an ad agency in Philadelphia. The year was 1869 (or 1868 — even Wikipedia on its own page can’t seem to agree). It was the first full-service agency that delivered creative and bought media. To get paid, Ayer negotiated a deal with the media to receive 15% agency commission. The 15% remained in place for almost 100 years, when it was slowly replaced and watered down by fees and fixed rates.
But the 15% remains a “thing.” There are still media deals made at the 15% rate. In fact, according to a recent Association of National Advertisers study on agency compensation, there is a bit of a resurgence of 15% deals in the programmatic space. Advertisers who need bulk reach forgo the typical negotiation about people x hours x mark-ups x bonus and instead just align on a straight 15% commission.
And 15% serves as a benchmark for agency income. Agencies aim to get as close to, or go over, the 15% equivalent of income from clients. Had N. W. Ayer set his rate at 17% or 10%, I think perhaps that number might have been the benchmark today.
So 15% media commission is still viable today, even though its role and importance has evolved. And now, in my home country, The Netherlands, the 15% commission story is evolving even further.
In late 2012, the sales house for national broadcasters, STER, announced it would abolish paying 15% to anyone. The argument: Commission was paid to agencies for their services as middlemen between advertiser and — in this case — broadcaster. However, STER had noticed that almost 100% of the 15% was being paid back to advertisers by their agencies. Instead, advertisers paid their agencies through the outlined fee structure. Therefore, STER concluded, 15% was outdated and no longer relevant.
The Dutch market reacted predictably when a major change is announced. Some said it was the beginning of the end, and others said it was a sensible new beginning. It was interesting that no other Dutch media companies followed STER’s lead. RTL Netherlands, one of the leading commercial networks, owned by one of Europe’s largest commercial broadcasters, RTL Group, said STER’s move made sense but was happening too soon.
Since Sept. 9 we now know how much too soon it was in the eyes of RTL, as it announced then that RTL, too, was abolishing the 15% commission rule.
I’m not aware of any other major media companies or countries that have abolished the 15% as well (and there certainly could be more). But what fascinates me is that, as an industry, this news story has not been picked up more broadly.
As I explained, the 15% commission “rule” is a bit of an agency standard. It is the one benchmark that has been in place since the invention of modern-day advertising. And now two large media sales companies have done away with it.
I can follow the arguments on why these two companies reached the same conclusion. Still, I wonder if this is indeed the beginning of the end for 15% agency commission, or just another turn in the road of marketing transformation.
Way back around 1968 BBDO abandoned the 15% commission, offering certain advertisers we shared with other agencies a discount---a lower fee to around 12%----if they gave us more brands and increased our billings. So motivated, we incresed our profits by virtue of the economies of scale---but, in the long run this helped to destroy the 15% commission concept for full service agency work for virtually all clients as rival shops soon made similar offers.
In Belgium the agency commission has been abolished from 2016 onwards, starting with the main TV stations in the North (Dutchspeaking), followed by the TV stations in the South (Frenchspeaking, including the Belgian RTL) the next year and then by most other media. The official reason was to make rates more comparable with online. The real reason is that it makes the total discount advertisers receive more dependent upon volume and therefore strengthens the position of the main sales houses (that are under pressure from more niche players).
Thanks Koenraad for the update from Belgium, and not surprised to see some other markets have followed suit. I think one other reason to do away with the commission is perhaps to be able to negotiate easier deals with the agency hold co’s? As you said it helps determine volume and discount for advertisers, but perhaps also makes the total volume deal with agency hold co’s easier to calculate? Dank je!
Can I interest you in a 135 year old bridge connecting Manhattan and Brooklyn, Maarten?