Agency Compensation Revisited

The issue of compensation, particularly for those agencies providing interactive media services, is an important one. The resolution will determine what level of service and be provided, what kind of fiscal viability the agency will have, and what level of commitment a client has to the use of the media (do they see it as a marketing tool of strategic value or a commodity?).

I've talked about agency compensation before and what form those in the agency business might want to consider it taking.

Those of you from a traditional agency provenance know the classic standard for compensating agencies is fees based on some percentage of spend. In the old days (and I mean OLD days), this percentage was fixed; eventually, compensating an agency for the work it did would scale with the spending the client committed to the media they were going to run. A full-service agency typically saw 15% of gross spend for a client's advertising campaign. Media companies like print newspapers, and television actually set their pricing structure such that costs for media would be "net" to an official agency buying on behalf of a marketer. That is, for $100 worth of media, the agency only had to give the media vendor $85 and the agency would keep the difference. This is what was known as the "agency discount." It was from this that agencies made their money.



Over the years, clients drove their advertising the same way captains of industry and CEOs slash and burn human capital in the face of economic hard times. Media became highly commodified in an environment that believed all media are created equal and the process become perceived (and portrayed) as mechanical. As a result of these ostensibly downward cost pressures, agencies could no longer charge the kinds of double-digit percentages for media buying and planning. Couple that with increasing budgets necessary for reaching smaller audiences (I refer you to news regarding this year's upfront), and clients would just no longer pay under this kind of structure. Like I wrote in last fall's article, does an agency really need to earn 15% of $300 million?

But when talking about online media, it is necessary to be clear on how the client intends to use the medium and what they expect the agency to do in maintaining it.

If the way the medium is being treated by the client is like direct response, then charging 15% -- particularly if the budgets are small -- is reasonable. That is consistent with the price paid for getting DR done in broadcast.

My opinion is that agencies need to start pricing their services, be they online or offline, like those services are valuable and not themselves just a commodity. Agencies need to be able to cover their costs, and clients should be willing to pay for those services in such a way that the agency can cover costs and make a little money.

A retainer based compensation structure is best because then what you are being paid is proportional to the work you provide and not the money the client spends. More than once I've worked on an account that has required a great deal of time and effort, where oodles of work has been done, only to have that client not spend at all. When compensation is tied to a percentage of spend, the agency ends up getting mugged. A retainer arrangement prevents this situation. Sometimes the agency is ahead, sometimes behind, but from the perspective of agency services being "dollar cost averaged," like some mutual fund buying strategy, the compensation structure works out for both agency and client.

If you take this route, just figure your costs plus a margin you are happy with and present that to the client. There is no reason to have to go practically pro bono just to have an account. The proper amount of cost control and productivity should leave you in a position to price yourself competitively such that the deciding factor on the part of the client is the quality of your services and not whether or not your price is the lowest.

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