Methods of Compensation for Advertising Agencies
Advertising agencies are compensated in three main ways: commission, negotiated fees, and markup charges. Determining the best compensation method requires balancing simplicity and motivation. While commission models are predictable, negotiated fees allow more flexibility to tie pay to performance. Opening up financials could highlight non-transparent revenue and realities that limit fee optimization. Agencies generate revenue by selling staff time with a markup to cover overhead and profit.
Major Methods of Compensation
There are two major methods of compensating advertising agencies: the commission and the fee method. Under the commission system, an agency receives a percentage of the media spend. Client invoices reflect a ‘gross rate’ that accounts for a markup.
Retainer Model
The retainer compensation model is a monthly fee for a "bucket of hours" of service. In this model, agencies act as an extension of the marketing team. Most agencies earn a net profit margin between 6 and 10 percent. The client and agency relationship succeeds when compensation enables the agency to invest in talent and services to meet objectives.