Agency commission has been the norm for many years, but is it still relevant or should media agencies be looking for another way of payment? In part one of the debate, Virginia Hollis considers the question from a media agency perspective. [In part two, to be published on Thursday, Times Media Group’s Trevor Ormerod will deliver a media owner’s point of view.]
There has been a lot of chatter on the subject of media agency commission over the last few years. Should all media owners run net rate cards? Out of home already does. So, why not convert all media?
Most major clients work on retainers with their media and creative agencies, and the agency commission is paid back to the client as a rebate. Having worked in a big media agency, I know this is the right thing to do… for big agencies. Big clients require a serious amount of resources to run their accounts so they need regular monthly income to cover staff and overhead costs. Media spend can be haphazard. It can be seasonal and reliant on whether there are budget cuts during the year, among other business and financial decisions. And paying monthly salaries can be a real problem if you are dependent on commission.
The agency commission is an international norm in this industry. However, agency commission is 15% overseas. This percentage is based on agencies being remunerated for the different services they provide. So the agency earns a specific percentage for each service – for example, a certain amount for client service, creative strategy, media, production and research – which all adds up to the 15%. And in addition, there is a mark-up on everything that the agency does for the client that attracts a hard cost.
South Africa is slightly different because we run on a 16.5% commission. Years ago we used to pay the media owner 60 days after invoice/statement, this was then reduced to 45 days, and to sweeten the deal for the agencies the commission was increased (from 15%) to 16.5%.
The theory behind commission is that clients should not incur any creative concept or administration charges. This system has become less popular in South Africa over the last 20 years as media agencies became more popular with clients. And let’s not forget that when media agencies started in this country, they started discounting the agency commission in order to secure the business.
There are a couple of alternatives to commission which are used today: monthly retainers, hourly rates and project fees. Which works best for agencies? It is debatable. While one method will work for some agencies but it is not a universal solution.
And then, another big spoke in the what and how media agencies are paid are those dreaded people in procurement. But, their role is to keep their company’s costs down and the job of media agency management is to ensure resources are costed correctly and such expenses are substantiated.
Let’s talk about costs net of commission, in other words if the advert cost R150 gross (including commission), then the net cost after commision would be R125.25. This is the actual cost that the agency pays over to the media owner. This system (with bills all being net of commission) is fine for a lot of the bigger agency clients because they work on a retainer. Would this work for smaller agencies? For some, maybe, but for most, no. Consider that to work in media requires strategy, implementation and buying. In big agencies, each of these disciplines is handled by a different person.
In a small agency, you have an internal media person doing strategy and maybe implementation, but invariably the buying is farmed out. A big client would have an exclusive team and smaller clients would outsource and share resources (people). How do you base a retainer on a big agency doing media work for a smaller competitor? It would probably come back to charging hourly rates. This would become incredibly cumbersome for all, and small agencies would find it very difficult to project their cash flow.
There is also the cost of the back office (administration and accounts) – someone has to pay for that. Big agencies amortise these costs over all their clients, and therefore the charge to client in the retainer is a small percentage. Small agencies need to either employ full-time finance and admin personnel or hire freelancers or consultants, again at a higher cost.
As already mentioned, buying today is not done by everyone, so a smaller agency has to pay a buying agency anything between 2% to 6%, putting the small agency at a disadvantage.
Smaller agencies often have to work harder to deliver the work because they don’t have a network on which they can draw for consumer insights, research and media analysis. Added to this is the cost of purchasing South African media research systems. The big agencies pay considerably less per user (understandably) but you must have the data if you are going to do your own planning.
For me the ideal form of payment for media agencies is a combination of part-fee, part-commission with a performance bonus on top of this. The agency then receives a retainer that smooths the monthly costs of running the business, a part of the agency commission that gives the agency the benefit of increases in budgets (there is, of course, the adverse, which is a decrease in budget) and a performance bonus that is linked to agency/client relationship, work delivery and client increase in sales/lead generation/awareness levels. Although payment by results represents value-for-money for clients, agencies may be reluctant to offer the facility as results can be affected by factors outside their control. This needs to be taken into account.
At the end of the day, how you are remunerated is not important; what is important is that the agency’s fee structure reflects the work it does. If it does good work, it gets remunerated. If it is bad, the agency is fired. But what’s important is that the revenue earned does not just cover the agency’s costs. It must include enough for the agency to make a profit. We all know that if you don’t make any profit on work done, you become resentful, which ultimately results in inferior work.
I know the Competition Commission has many questions around agency commissions. But surely if they realise the impact net rate cards would have on smaller business, they would be a lot more amenable to the system. After all, at the moment the commission system is the only system that allows everyone to operate equally.
This story was first published in the April 2014 issue of The Media magazine.
Virginia Hollis was recently appointed chairperson of the South African Audience Research Foundation.
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