In the second part of the debate on media agency commission, Trevor Ormerod delivers a media owner’s perspective on the controversial topic.
In an effort to try and understand if the debate on agency commissions versus rebates is valid, I turned to Wikipedia to get a sound definition of the word ‘commission’. I found this: “The payment of commission as remuneration for services rendered or products sold. Payments often will be calculated on the basis of a percentage of the goods sold.”
From a sales point of view, the above is very relevant. If a sales rep makes or exceeds target, they are rewarded with a payment, which is either based on the percentage exceeded or as a percentage of the target achieved. Does this same principle apply to media and advertising agencies? I humbly submit… not.
The 16.5% agency commission evolved many years ago (even before my time in advertising) where agencies were compensated for services rendered. It was based loosely on a European model where the percentage was made up of X% for copy writing, X% for creative, X% for production and X% for media. It was great at the time, but then the media section was hived off a decade or so ago. Part of the commission then had to be negotiated so the media house could survive. And it all started getting a little complicated. The complication was due to the fact that, instead of having a set standard fee, the media agency had to negotiate a fee out of the 16.5% based on what services it would deliver. In some cases, that fee varied between 1% and 4%.
So, let’s get back to the principle of commission; in other words, paying for targets attained or exceeded. Hmm, that’s never been the case with agencies. I have never heard of a media agency negotiating commission based only on the client’s performance. Yes, they receive performance bonuses if this is achieved, but the agency ‘comm’ is payable irrespective of this. There is no risk-and-reward model; the agency gets paid its negotiated portion of the commission whether it achieves its objectives or not.
Taking this into account, as well as the fact that some accounts are not that active all year, agencies started pushing the idea of retainers instead. This helped immensely with their regular cash flow. Some agencies opt for bonus-based deals. In this case, the rewards are for clients that either achieve certain business objectives or where agencies exceed media objectives.
There is also another vital issue emerging in this sector, one related to the Competition Commission. This statutory body is questioning why there is a common currency in the media industry, saying it is palpably anti-competitive to have a standard 16.5% payment.
This was initiated some time ago when the Commission started investigating anti-competitive practices in the advertising industry. It regularly interacts with the media owners, asking for all kinds of information on rates, discounts, circulation and other financial information. In our case (Times Media Group), we submit the requests to our lawyers who deal with the Commission directly. The whole process is ongoing.
The Commission believes that, to level the playing fields, payment for services rendered should be based on a negotiation between buyer and seller and not on a set standard industry amount. This is a good point.
I need to mention that as much as media owners build the 16.5% into rates, clients don’t just accept this standard anymore. And in most instances, the agency and media agency get only a smidgeon of the amount as the ‘standard’ is no longer accepted by clients. In reality, clients have insisted on negotiating the amount.
Media owners (except for the outdoor companies that have gone to net rate cards) are increasingly under pressure to start working from net rate cards. We (as media owners) have resisted this to date because there is a concern that it might affect some of the small agencies with unsophisticated clients that still survive on the 16.5%. The pressure, however, is coming from the Competition Commission and sooner or later net rate cards will become the norm.
So, in my humble opinion, the 16.5% agency ‘comm’ of old is a dinosaur that is rapidly becoming extinct and will be replaced by fees, retainers and other models in future. And in this way, one of the last remnants of the ‘old’ agency days will fall away. In a way, it’s a pity because it was a very easy way for agencies to calculate exactly what they were going to make out of their clients’ billings. But now we start things with good old hard negotiating. It could be worse!
Trevor Ormerod is group general manager of advertising sales at the Times Media Group.
This story was first published in the April 2014 issue of The Media magazine.
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