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Paying Your Agency

4 Remuneration Methods

Once agreement is reached between the client and agency as to which rate method they wish to use, the rate(s) can then be applied to the four remuneration methods described here.

1. COMMISSION
Used for paying agencies who buy media space on behalf of advertisers. The reason is simple - the method for calculation is a percentage of media investment.Every time an agency places an ad with a media owner, the agency receives a standard 15% off the negotiated price. This 15% allows the agency to work to a suitable remuneration level with clients, either retaining the full 15%, or an agreed level below this.

This model is unsuitable for creative, digital and design agencies. Even within media agencies, commission is not the only remuneration model. Many clients seek alternative methods.

Scenario examples

Negotiated price for client Price paid to media owner by agency Agency remuneration
(diff between paid & negotiated rate
Net client price
15% commission retained by agency €1,000 €850 €150 €1,000
10 % commission retained by agency €1,000 €850 €100 €950


Strengths

  • Tracks with media investment, meaning clients pay based on level of work generated by their media investment.
  • Simple mechanic for clients who want all media costs blended into one system (plan, invoice, PO etc.).
  • Relatively easy to calculate.
Weakness
  • Unsuitable for non-media disciplines.
  • While more appropriate for media agencies on-going account management or planning needs a client requires (for example where spend is light but client would like on-going service) not possible
  • Rewards on media expenditure and not the time and resource allocated to client.

2. RETAINER FEES
Retainer fees have become an increasingly popular method for agencies and their clients. A fixed fee for a set period (normally 12 months) is agreed for a pre-agreed list of outputs.

Before the retainer is agreed, a work and resource plan must be put in place, covering all details and activities that need to happen within the agreed time frame. This allows the agency to estimate the level of resource required to deliver the services and outputs and price it accordingly.

When resource levels are agreed between the agency and client, the hourly or blended rates (as outlined in section 1) are applied, giving a fixed fee for the period.
As market conditions change and the scale of ambitions are re-defined - e.g. increased market share as a result of a successful marketing campaign - the resources required will need to be altered accordingly. For these reasons, a retainer fee should be re-negotiated on a regular basis to protect both the agency and the client.

28% of all agencies, both creative and media, are currently remunerated using the retainer method.

STRENGTHS
  • Establishes exact staffing requirements for the year.
  • Guarantees the client a committed resource from the agency for the year.
  • Agency and client can manage their annual budgets more easily.
  • Reduced admin time on both sides in calculating and agreeing individual project fees.
WEAKNESSES
  • Requires definitive and detailed work plan to be prepared in advance.
  • There are no direct incentives built in.
  • Actual resource requirements may vary significantly from original estimates.
  • Can be inflexible if reviews are not built into the process.

3. RETAINER + PERFORMANCE RELATED INCENTIVE PAYMENT (PRIP)

This model gives the strength and stability of the retainer model while adding an incentive component. It aligns agency performance with the company's marketing objectives.

How it works
The retainer fee for the period is agreed. A portion of the annual fee (say 15%) is set aside until year-end, pending the achievement of a number of pre-agreed targets/criteria. The remaining portion (85%) is divided equally and billed over 12 months.

At year-end results are measured against the PRIP targets and, if achieved, payment of the remaining 15% is made in full.

Where annual targets are exceeded, the agency should abenefit from that outperformance - i.e. up to 115% of the retainer fee may be earned where certain criteria/sales targets are met.

15% of all agencies, both creative and media, are currently remunerated using the retainer + performance related incentive payment method.

STRENGTHS
  • Works well with FMCG companies
  • If sales increase so does an agency's income.
  • Can be more motivational.
WEAKNESSES
  • May not suit service industries.
  • Requires detailed post-campaign analysis.
  • Does not lend itself to change i.e., increased industry competition, downturn in economic circumstances etc.

4. PROJECT FEES
Where there is no clear work plan, it's difficult to calculate retainer-based remuneration.

In this scenario, individual project by project fees may be negotiated.A project fee is a combination of the number of hours estimated to carry out the project x the agreed hourly or blended rate.

If there is no fundamental change in scope during the project, the client will be charged the project fee agreed at the outset.

However, where the scope of the project changes before completion, the agency should advise the client immediately the effect the change will have on the final project fee.

STRENGTHS
  • Directly related to single deliverables.
  • Simple to control.
  • Suits niche services.
WEAKNESSES
  • Each project must be priced individually.
  • Level of work can change, staffing needs may change.
  • Impossible for agency to dedicate resource to the client.
  • Does not encourage brand building.

Contact IAPI

12 Clanwilliam Square, Grand Canal Quay,
Dublin 2, Ireland.
T: 01 676 5991
www.iapi.ie
Hours are 9am - 1pm and 2pm till 5:30pm
(Mon - Thurs) and 5pm (Friday)

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