How much should agencies be paid?

In a Creativity article, Tim Broadbent writes about proving the value of advertising. He discusses that as many agencies are no longer being paid based on media commission, they need to figure out a new standard for payment. And one that is equivalent to the worth of the work that they(we) create. Broadbent takes a look at some ad history to see how we got to the point we're at today.

Read more for an excerpt...

Remuneration has never been higher on the agenda, but ad agencies will have to convince clients of their worth if they want to demand a fair price for their work, Tim Broadbent writes. King James I founded the first advertising agency on 5 March 1610.

His Letters Patent made Sir Arthur Gorges and Sir Walter Cope, two gentlemen of his privy chambers, advertising agents for the kingdom. But they had a problem: how much should they be paid? A condition of their grant was that clients would not be charged more than pleased them. Gorges & Cope went out of business within a year.

The same question is being asked again today: how much, and how, should agencies be paid? The recent Seifert and Early case in the US came about because Ogilvy stood to lose $3 million servicing the Office of National Drug Control Policy account. ISBA is due to publish its updated remuneration guide soon, which amounts to clients saying what agency charges would please them. The precedent is not encouraging.

A study by David Haigh for the IPA in 2004 showed that agencies' profit margins have become wafer thin. Haigh found agencies only make any profit at all by drastic cost-cutting. As agencies' biggest cost is their payroll, they are tempted to pay their staff less. Most alarmingly for the future of the industry, new recruits in particular are paid much less than they would get in other jobs - not just compared with the law and accountancy, but less even than they would get in client marketing departments.

Advertising has always been a high-risk business. As Nigel Bogle once said, all agencies are three phone calls away from disaster. But it used to be a high-risk/high-reward business. Now it seems to be a high-risk/low-reward business - not a great combination.

It raises the question, why would the great strategists of the next generation want to work in ad agencies any more? Agencies don't just pay less, they have less influence on marketing and communication decisions. If agencies no longer attract the best strategic brains, if they merely execute marketing plans developed by clients, they may become vendors of technical services and nothing more.

It could get even worse. Clients have more to worry about than the relationship between their brands and their customers. Brands themselves may weaken if ad agencies decline.

How did we get into this predicament? In the past, clients didn't pay agencies at all. Agencies made a living on the difference between the retail and wholesale price of media space. George Rowell, who did as much as anyone to establish the media commission system, described his first deal in his book Forty Years An Advertising Agent, 1865 - 1905. His idea was to buy columns of space in New England country papers at the wholesale price. If he charged clients half the retail price per line, and sold half the lines, he would get $13,000 for space that cost him $7,500. To a young newspaperman earning $18 a week, this was real money.

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LeslieBAP's picture

Hmmm...maybe I'm crazy, but wouldn't usage-based pricing solve a lot of the problems? For example, if the media is purchase directly by the client or through some other agency, the creative agency knows how financially important it is to produce good, balls-on creative for that space. A $25M media buy is not as expensive as a $250M media buy so it shouldn't cost as much for the creative (yes, even though a $25M media buy may be HUGE for the client involved while the other may not). So, price based on a percentage of the buy. Then, to ensure profitability and accountability, build in a performance-based "bonus" into the contract.

Of course, I'm just musing here...

philmang's picture

of course the model of percentage of media is harder to use when the media being purchased is relatively low priced compared to the cost of developing the creative. Interactive and non broadcast forms of marketing are often far more expensive to create then to publish. Of course the percentages would need to be substantially higher - sometimes in the multiples rather than the percentiles. Although, if production were included in the cost upon which the strategy and creative percentage was being assessed, then those %s would become more reasonable again... hmmmmmm

AnonymousCoward's picture

Friedrich Nietzsche said; "God is dead!" - not all that long ago.

I think that advertising will soon be declared to be in the company of God.

Vague and elusive as my words may seem, they are spoken with wry optimism as to what will follow. The house has changed bricks for cards and the wind is blowing.


Dabitch's picture

Congratulate me, Joe! I just sold the business to the Resor boys. They don't know it, but the advertising agency buisness has seen it's best days!
Mr. Thompson from J. Walter Thompson in 1916

AnonymousCoward's picture

Ouch, ouch, ouch.

Why do I feel like a vampire that has just fallen on a toothpick? ;)

Dabitch's picture

heh, I got quotes for all occasions! Come and get 'em hot and fresh! ;)