Advertising


What Do Advertising Agencies Charge?

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CEO

Phil Ouellette

Listens to Christmas music year-round.

What do advertising agencies charge?

It’s a simple question with a not-so-simple answer.

Broadly speaking, advertising agencies charge for their services based on the roles, experiences and number of people they apply to solving their client’s needs. This is the nature of most professional services, from financial advisers to lawyers.

More specifically, there are a variety of methods ad agencies use in pricing for their clients:

  • Retainers
  • Full Time Equivalents (FTEs)
  • Blended rates
  • Project fees
  • Time and materials (“rate card”)
  • Fixed fees
  • Media commissions
  • Production mark-ups
  • Licensing
  • Percent of sales bonuses
  • Equity incentives
  • Pay for Performance (PFP)
  • Value pricing

Confused yet? That’s okay. Stay with me and maybe we can sort it out for you.

Why are there so many ways advertising agencies charge?

That is an entire book for another day.

Suffice to say, most pricing methods these days are still based on some kind of labor-input consideration, according to the 4A’s (American Association of Advertising Agencies). Ideally, this approach should align appropriate agency resources to the types and volume of workloads expected from the client.

Media commissions used to be the norm back in the golden age of advertising, all the way through the 1980s. Agencies were paid entirely based on the amount of media they bought to advertise their goods. The upside: It was easy to calculate and had a strong historical practice that was the accepted norm.

But that practice virtually disappeared the past few decades, and as of a couple of years ago, media commissions represented a mere 3% of total agency industry compensation. But what’s old is new again; with the rise of “always-on” digital media, there has been a significant shift back to media commissions as a mode of compensation.

Production (and related) markups were another popular form of pricing for agencies. By adding a mark-up factor of say 25 percent on the cost of TV production, agencies could tie revenue to a predictable activity. But the decline in TV advertising and the rise of digital videos means speed and quantity have driven down the cost of production, making this approach less practical.

Other compensation forms known as pay-for-performance (PFP) have become somewhat more popular, at least in the press. These include tiered bonuses, equity shares or options, and percent-of-sales bonuses. Incentive-based pricing options reward agencies based on performance of the work against the objectives outlined at the beginning of the engagement. The basis of performance should ideally be an objective one based on specific and obtainable client measures that the agency can affect.

Ultimately, many clients and agencies use a combination of these different pricing methods to tailor payment structures to fit their particular situations.

What sort of Agency should I use?

Pricing questions are often dependent upon who you’re working with.

Are you looking for a web dev shop to create a landing page or a content studio to produce some simple how-to videos to post on your social channels?

Or are you looking for a strategic agency to help you determine your brand’s competitive position in the marketplace or recommend how to invest a small budget (relative to your competitors) in a national campaign to support a new channel partner?

Do you know specifically what you need accomplished or do you need the experience of an industry professional to help you sort through the options?

The answers to these and other similar questions will go a long way to determining what advertising agencies charge for their services.

Short Term or Limited Scope Projects

Let’s say you know exactly what you need. The brand guidelines and templates are in place and you need to kick out some simple trade ads. Or you have a concept for a short social video you want to create.

In both cases, an agency that specializes in this type of work should be able to quickly and competently complete those assignments with minimal guidance and supervision. Most agencies will quote this work based on the number of hours they estimate it will take to complete the project within a specified timeframe.

Agencies like these, sometimes called content studios, operate more like a factory in the sense that their business model depends on keeping their production line operating at near full capacity. This allows them to offer lower rates and quick turnarounds at a reasonable quality standard. There is not much—if any—slack for client approval delays or rework if a client changes their mind. Their model just doesn’t support this behavior.

But if you know exactly what you want, can explain it clearly to your agency and hold to a schedule, using a content studio can be a great way to stretch your marketing dollars. There are many agencies that operate on a low-cost model, so competition can work in your favor.

In the cases above, you can probably find capable providers willing and able to perform the work for $100-125 per hour. And if you’re game, sourcing it overseas could provide even bigger savings, especially for web development and design work.

Long-Term Projects or Agency of Record (AOR)

If you serve a larger geographical market, have a sizable product line or manage multiple distribution channels, chances are you have more sophisticated marketing needs. Needs that are longer-term in nature. And in that case, you likely require an agency with a broader menu of services, certain industry experience or a strategic capability.

This is where there can be more differentiation in how advertising agencies charge their clients.

The most common form of pricing for these more complex relationships, especially for larger brands, has been to develop a monthly fee based on estimating the number of full-time equivalent (FTE) employees required to fulfill the client’s requirement over a period of time (usually 12 months).

The client provides the agency a list of deliverables (often to referred to as the scope of work, or SOW) needed over the coming period. The list may include:

  • Marketing strategy
  • Consumer insight work
  • Creative concept development
  • Type and number of produced creative assets
  • Media plan and buys
  • Creative asset trafficking, tracking, optimization
  • Campaign performance reporting
  • Ongoing strategic account management
  • Schedule milestones

The agency then develops a resourcing plan to meet the specified needs outlined in the SOW. This would include the types, experience levels and amount of people required to deliver the SOW.

The client and agency would then negotiate and agree on a monthly fee that (ideally) covers the necessary agency resources.

This worked well enough in the past when the marketing mix was simple with TV, radio and print and some banner ads. The formula for marketing was straightforward.

Today, there are literally thousands of channels available across multiple media platforms requiring hundreds if not thousands of creative assets. Managing those media and production needs in a dynamic market requires sound project management, strong reporting and analytic capability and continual optimization, which makes it difficult to predict what’s needed next to drive up the return on marketing investment (ROMI).

The result is the monthly FTE-based fee is either subject to continual adjustment (i.e., change orders), reconciliation (i.e., refund or charge for the actual vs. estimated difference) or the agency absorbs the changes and the quality of work suffers. Neither is a desirable situation for agency or client.

More Can Be Better

Let’s use an example mentioned above – you need to develop a nationwide campaign to support a retail partner with a budget relatively smaller than your competitors. For the sake of argument, let’s say $5M.

The campaign needs to be in market for 6 months and drive a 3.5 percent lift in sales nationwide at a retail partner’s stores. The list of deliverables is the same in the example above. You find an agency with whom you have great chemistry and they possess necessary experience and skills.

Instead of trying to calculate one big fixed monthly fee meant to cover everything you need the agency to do, break it up into more manageable components. Today’s media landscape is extremely dynamic and your goal should be to create a flexible pricing structure that recognizes market realities.

Admit that you will need a certain base level of ongoing strategic support from start to finish. So start with a relatively small base monthly retainer both client and agency can agree upon. In this example, it might range from $20K-35K per month.

That support covers the strategy work – like uncovering that critical consumer insight and mapping the consumer journey — which will drive the marketing, media and creative plans, and provides “stewardship,” ensuring that everything stays on strategy throughout the campaign.

There will also be daily phone calls, weekly or monthly status meetings and campaign reporting once the campaign has gone live. Creative will need to be regularly trafficked and tracked. And campaign reporting, analytics and optimization will be essential once you are in market.

Next, develop a fixed fee for creative concept development. We often refer to this as the “big idea” that drives how the campaign will be executed in the marketplace. With the big idea in place, develop another fixed fee to produce the necessary number of estimated creative assets.

Since your media spend will be limited, it will be primarily digital. Here you could take a mixed approach for planning and buying. With a good sense of the media budget and plan complexity, the agency should be able to provide a fixed fee quote to develop a media plan. Buying digital media is much more labor intensive than traditional media, so using a commission-based approach may better align the agency resources required with the level of buying in market.

And if you want to motivate your agency to drive results, ask them to consider reducing their base monthly retainer. It could be in exchange for a percent of increased sales or even some form of equity (as we have done several times here at LSB) if they can exceed the goals of the campaign. Just keep in mind, the “reward” should be large enough to justify the “risk.”

So, the combination of a monthly retainer, fixed fees, a media commission and possibly some performance-based incentive could both align agency resources with client needs and be easier to sell up through your organization.

How can I get the best price from my agency?

Keep this in mind: Price is what advertising agencies charge. Value is what clients receive.

I am not suggesting price is not important, of course it is. But focus on the value you expect — that is, focus on results that move the business.

Find an agency with whom you have great chemistry. One that has experience in your industry. An agency that has the skills you need for your organization.

Provide clear goals and measures that will define success upfront so it can be built into the plan and will drive the marketing, creative and media strategy. Build internal support in your organization by ensuring key players are on board with those goals and measures. Have a clear “owner” of the relationship.

Brief your agency thoroughly so they understand the good, the bad and incidental. Create a list of the required outcomes and deliverables. Establish your priorities. Respond on a timely basis for approvals or feedback as necessary.

Be honest about your budgetary constraints—everyone has them. Be ready for learning and surprises, so make sure your agency builds in some contingency into the plan budget.

And if you have established the goals and measure for success, hold the agency accountable throughout the process to hit those numbers.