Creative Agency Percentage Compensation
We found the following examples of compensation models for creative agencies: the commission system, the fee system, a retainer agreement, value pricing and hybrid pricing models. We will expand on each of those below.
The Commission System
- In this system the agency receives a percentage of the production charges.
- The advantages to this system include the fact that it is simple to execute, and once the media plan is in place, payment amount is relatively fixed.
- Some challenges of the model include the fact that the model does not allow for complexity, degree of difficulty or extra services the agency may provide.
- A recent (2019) survey of digital advertising agencies revealed that 34% charge by percentage of the spend, 50% charge a flat fee, 11% charge by billable hours and 5% use another model.
- Of those who charge a percentage of the spend, 6% charge less than 10%, 36% charge between 10 and 15%, 33% charge between 15 and 20% and 14% charge over 20%. 11 respondents declined to answer.
- What is included in the commission and what is charged separately differs from one agency to another. Guidelines from one of the sources are reproduced in table format on the attached document.
The Fee System
- At it's simplest the fee system means the agency and the client agree on a standard hourly fee calculation fee.
- One model has different staff members billed at different rates, depending on their skills sets and their importance to the success of the project. Alternatively, the agency calculates an average cost for all team members.
- The standard calculation has a fee of three times the person's annual salary divided by the number of hours that person works on an annual basis.
- The agency fee is then calculated by estimating costs for rent, telephone, postage, administrative services, taxes, any other relevant costs and desired profit margin.
- The second is a project or fixed fee model in which a flat fee is agreed upon before the project begins for all the deliverables of the project.
- The advantages of this system include a standard pricing model agreed to by the agency and implemented consistently. An agency rate card can be provided to the client which gives the client an insight into typical charges and allows them to make decisions appropriately.
- Another benefit is the agency is no longer as closely monitored by the client. A fixed fee incentivizes speed and quality in the agency, and, if the estimating is done properly, can increase the profit margin considerably.
- On the negative side the risk to the agency of undercharging could be significant unless the agency is established and experienced.
In both of these models, the total media spend is not a factor in the pricing.
A Retainer Agreement
- A retainer agreement is simple — the agency is paid a monthly or yearly fee whether they work or not. They must however, commit to being available every month for a certain amount of work.
- Included in the contract is the clause that if the agency cost goes over the retainer, then a predetermined price list comes into effect and clients are charged over and above the retainer accordingly.
- Clients often like retainers because the agency gives them a lower rate, while agencies like retainers because it guarantees a steady cash flow. It is however, a gamble for both sides.
- Value pricing is definitely one of the riskier pricing methods an agency can use. It also requires a more complex pricing model as the final billing is based on the value the client gets from the work.
- There are some advantages to this model. From the client's perspective, it strongly incentivizes quality work product and if the client sees it as performance based that could be appealing to them.
- However, the disadvantages are significant given that it can be difficult, and often subjective, to calculate value. Not only that, but the agency does not always have control over factors that affect value.
- However, if an agency is confident of the value they bring and have a transparent way to calculate it, it can significantly improve their bottom line.
- An example of this from one of our sources is described on this document.
Hybrid Pricing Models
There are a number of possibilities for hybrid-pricing models. Some of them are:
- 1) Commission with Minimum Guaranteed: In this model, a minimum amount of compensation for the agency, including the profit, is defined by making assumptions about the level of service required for a defined period, usually a year. Payments are traditionally made monthly, with commissions credit against the payments, the agency keeps the excess of commission over annual payment at year-end. In this model the percentage fee charges against the media spend is determined by the agency.
- 2) Flat fee plus direct labor costs: As quoted directly from the source, "This is a combination of ‘fixed fee’ plus ‘hourly charges’. There are several varieties. The fixed, or flat amount, can be the agency charge for either: (1) overhead, (2) overhead and profit, or (3) just profit. Correspondingly, the hourly charge would cover either: (1) direct cost and profit, (2) direct cost only, or (3) full cost. Each variety is a way of modifying the ‘cost plus’ fee arrangement, i.e.: the higher the cost to the advertiser, the greater the profit to the agency."
- 3) Reduced Commission/Sliding Scale: The higher the media spend, the lower the commission becomes for defined periods of time. This model is intended to share with the clients the economies of scale inherent in a large campaign.
We began by defining "popular" as the creative agencies with the highest revenue. Of the top ten by revenue, none of them advertised their fees. We expect it is like restaurants with no prices on the menu, if you have to ask, you can't afford it.
Once it became obvious to us that the top agencies do not advertise their pricing models, we expanded our search to any advertising firms that disclosed their prices. We have included a sample in the attached document.
From there we turned to the world of advertising professionals who wrote articles in the last year on pricing models. We found five comprehensive articles addressing that issue, analyzed and synthesized them to create the key findings.