Most marketing and advertising agencies receive fixed or work-based payments for their services, rather than commission-based payments, according to recent research by the National Advertisers Association (ANA). This model is beneficial for customers as it is more predictable, requires minimal management, and is easier to negotiate. Agencies may offer different models depending on the client's circumstances, or combine models such as a per-project fee for creating an ad and an hourly service for media purchases. Hourly billing is the traditional method used by advertising agencies.
The agency will charge a fixed hourly rate and track the number of hours needed to complete the project. This rate includes any benefits the agency may offer. Another variation is that the agency quotes a certain number of hours and the client pays them in advance with any billed overages after the project is completed. Agencies may also receive a commission based on their objectives.
This system is more flexible than it appears, as agencies often provide additional services to large clients at no extra cost in order to justify their commission. With a performance-based campaign, the agency may agree to receive a certain amount per sale. Fixed pricing, or project-based pricing, is another model in which the agency charges a fixed price for a specific advertising campaign. Companies using incentive-based systems determine agency compensation through media commissions, fees, bonuses, or some combination of these methods.
Agencies should be aware of clients with fixed budgets at the beginning, as this can lead to unrealistic budgets and budget deficits. Vendors have also been pushing for changes in agency compensation models. While only 7% of agencies use the value-based model and only 12% use a commission-based model, agencies are exploring alternatives that affect cash flow. The project-based compensation model has its own challenges, as when projects change or estimates are off, the agency can bill the client for additional costs.
The estimate is calculated based on a rate sheet (each agency function has a different hourly rate) or a combined rate (an average of the hourly rate for all functions combined). Commission-based pricing is still very common and is often part of a hybrid pricing model, or possibly one of the many options an agency can offer a client. When setting up an agreement between an advertiser and an agency, it is important to ensure that goals are clearly stated from the start, that it is as simple as possible, that interests and priorities are aligned between both parties, and that it is fair to both sides.
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