Did you ever have a treasure map when you were a kid? Maybe one with the footprints to denote the correct path to follow and clues to be deciphered along the way. Perhaps your mom buried chocolate coins in a box, and made a map with clues about its location that provided hours of adventure and digging in the backyard flower garden to uncover the treasure. Business is a similar adventure in that we are seeking to find the treasure through the right pricing model and margin, “X” if you will, with the business model being the “map”.
As a new agency in 1998, our wise founder saw the value in a commission-based fee structure and how relational it was to our clients’ successes and failures. In those days, a commission-based fee structure was common among agencies, making up around 70% of all agency compensation structures. Over the following 15 years, compensation via commission was abandoned by many for more seemingly profitable fee-based models, to the extent of making up only 3% of total agency compensation in 2010 per a recent report put out by the ANA. According to the same report, there appears to be a resurgence in commission-based compensation, which is now back up to 12%, as of last year. So why is that? I believe it has a lot to do with the more recent push towards transparency and what value clients feel they are getting. They are looking for agencies to be more accountable and have “skin in the game”. What worked well years ago in commission structures is still seen as a fair and equally equitable solution to hold both accountable and incentivize work for success, and is returning as a viable compensation structure for agencies.
Commission-based fees are relational, more so than other methods. Mathematically, commission is defined as a fee based on the percentage of total sale:
Media Spend (Net) + X (Commission) = Gross Media Budget
If commission is agreed on at 10%, then the net media spend would be 90% to equal 100% of the client budget. With a total client budget of $100, the agency commission would be $10 and the media spend would be $90. Often confused with commission, is markup. We occasionally get a client or prospect that doesn’t understand the difference, and to be fair, it’s incorrectly used interchangeably in conversations. Markup is a fixed or percentage amount added to total sale:
Total Media Budget x Markup = Total Client Cost
Thus, if the media budget is again $90, and the agreed markup is 10%, the total cost would be $99, not $100. The agency fee is $9 instead of $10, and if you divide $9/$99 (total cost), margin is 9% instead of the 10%. The mathematical formulas, the results and the concepts are not the same. That fundamental difference can hurt fair margins and account for misunderstandings that can affect good working relationships. As part of the equation, rather than marking up a final product cost, the agency is more incentivized to be vested in the growth and success of the client campaign. We grow with our clients, and we fail with our clients. As marketing budgets rise and fall, so do our fees and margins.
We have changed our “map” many times as processes, resources and other factors in our industry evolve, but we have never changed our philosophy about providing value to our clients and that our growth is exponentially tied to their growth. We have found the “X”, but what treasure lies buried is reliant on us as an agency to grow your business and you as a client to join us in the adventure.