Advertising Agency Costs Simplified

In the heyday of the Advertising Agency, Mad Men, Don Draper may’ve been an enigma but the creative campaign was simple and so were his billing structures.

Now, it’s anything but. More channels, more content, more opportunities, equals more complex advertising agency costs. Transpires, it’s not just the glamorous allure of 60s Madison Avenue we’re nostalgic for…

Just because channels have become complex though, does it also mean billing structures have to be too?

The subject of agency fees has historically been a subject shrouded in mystery. But it needn’t be a dirty question to ask. Brands and their agency partners can have straight up conversations about money, time and process.

Back then, Advertising Agencies used to mainly exist to help clients develop creative Ad campaigns for television, print & radio. It was typically monetized based on the ‘Ad spend’ where the agency would purchase the media on behalf of the client and receive a 10%-20% commission on the media spend itself. So, if a client spent $2,000,000 per year on ‘media’, the agency would see a 15% cut ($300,000 in this case) and provide the creative as a part of the service.

While the models and commissions usually varied a little bit from agency to agency, it was a fairly simple formula.

Now agencies provide a multitude of specialized services that don’t always include media. In many cases, clients will use specialized media agencies for the purchasing of Ads, and a creative company for the development of the campaign or brand assets. This has spawned a shift in fee structure for many agencies to focus more on time and materials, and less on media. As the industry focuses on providing niche services versus full service, this has become more commonplace.

That said, many agencies (usually larger ones) will continue to work on a media basis for clients that have large advertising budgets. But what about clients that don’t necessarily invest in outbound advertising and utilize the services of an agency for collateral, website, signage, inbound marketing and other non-media based projects?

2 Different Creative Agency Fee Structures:

As a time-billing industry, services are provided much like Accountants and Lawyers. Services are provided, time is accrued by the agency, and the agency bills on an hourly basis for the time.

For materials (proofs, supplies, copies, printing etc), these are often added with a 15-20% mark-up from costs.

As you can expect, hourly rates in the industry vary widely; from $40/hour for a freelancer to $300/hour for Creative / Strategic Direction from a global Ad agency.

Agencies will use different rates for different specialists within the company depending on market rates, and the skill level of the person fulfilling the service. And, of course, talent plus demand will always command the highest fee.

2. Flat Rate / Project Cost
For some projects, you may agree to a flat rate price for a package of goods and services, regardless of time and materials. This is more common if your project has a defined scope, and/or the agency has experience delivering a specific product – for example, a brand identity package. The agency know that it costs them X to produce that package and so can set it as a fixed price.

The benefit, is that everyone knows the final cost. The downside, you lose some of the flexibility. For example, you may only get a set number of amendments or creative ideas to choose from.

In 1988, Paul Rand, one of the world’s most well-known ‘logo’ designers, famously charged Steve Jobs $100,000 for the development of the ‘NeXT Computer’ logo. They were given one idea and one only. There was a tremendous amount of value earned from the very fact that it was the legendary Paul Rand producing the work and despite the ‘quantity’ being only one, the quality expectation was unquestionable.

3 Top Budget Planning Tips

1. Have an honest upfront conversation with your agency about financials and your available budget. Do this at the very start. Be realistic about what you want to achieve versus can achieve with it. Agencies work very hard to maximize your budget so you get bang for your buck. Having this conversation early on will determine if your agency is the right fit based on budget. Plus, it will spare both parties time and money, in preparing non starting proposals.
2. Develop your expected ROI and objectives for the project. In other words, if you have the completed project in hand, what are the expected business outcomes? More leads? Better brand awareness? High price position? Increased market share? Once you have a sense of what the financial value to your company is, you’ll be able to better measure the value of the investment. If your project has a definable ROI, share that information with your agency! If your project has no definable ROI then you will likely be searching for pure talent rather than a business process. In that case, to match an agency to your needs, the criteria should be subjective, not financial.
3. Benchmark your agency fees. With your agency proposed fees in hand see how they compare against benchmark. Look at all aspects of the proposal, from staffing levels and hours, asset deliverables, overheads and profit margins. It’s perfectly acceptable to ask your agency for this information, so that you can determine if your budget could be working harder for you before the contracts are even signed.