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?
1. Time & Materials
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.