To a distant observer, a few facts about the marketing communications business may appear contradictory. The industry's turnover is growing at a healthy pace, there is increasing global interest, and the number of agencies is going up – even counting the occasional merger or takeover. So the industry must be doing well. On the other hand, margins and profitability seem to be shrinking, agencies are not being able to attract top-notch talent and invest for the future, and there is talk of the marketing communication product being increasingly devalued.
Connected to these apparent contradictions is the core issue of agency remuneration. Specifically, who pays agencies? What should the method of remunerating agencies be? And how much is fair compensation? The answers to these aren't easy, but let me highlight a few key issues.
For DM & PR agencies, the source of revenue is clearly the client, so there is no scope of confusion. But for most media (including OOH & digital) and a lot of creative agencies, the earnings come as a share of media spends in the form of media commissions. This causes some to believe that media houses pay agencies by way of commissions. Historically, ad agencies did start off as agents of publications soliciting clients' businesses (hence the term 'agency'). However, though still playing an intermediary role, agencies today primarily work for and are accountable to clients.
To determine the correct method of paying agencies, one must try to define the nature of the product or service that agencies sell. Do they sell a standard, well-defined product or service that should be paid for as per a fixed rate card, like barbers, doctors or research companies do?
Should they be paid through a percentage of the total outlay, as for headhunters, travel agents or a real estate brokers (who, incidentally, often get paid by both the buyer and seller!)? Or should agencies be compensated for the agreed time that a set of specialists dedicate for a project or a client, like carpenters, consultants and software firms? And should high-calibre teams be able to charge a premium for their output, like renowned artists, ad film makers and lawyers?
The truth is, agencies use almost all of the above models in different situations. While artworks are charged basis rate cards, a lot of the business still operates on commissions, though there is increasing adoption of the fee system (initially by MNC clients, basis time costs). Thus one often observes an apparently incongruous situation where a creative agency's tangible output is a communication idea, but it gets paid through a percentage of media spends, and its valuable strategic inputs are given away for free!
The differential pricing model, however, seems conspicuous by its absence in this industry. A growing feature of agency remuneration systems is the performance incentive based on predefined parameters, which if fairly used, can boost an agency's performance, morale and earnings.
So what is the likely future of agency remuneration systems? The historical commission system seems unlikely to disappear soon (particularly for media agencies), mainly due to the continuity factor and some clients' reluctance to pre-commit fees (and in some situations, agencies prefer it too). However, the fee system is likely to gain greater acceptance, and this should help agencies plan for the future, invest in resources, and pay their employees better.
The next logical step for a few agencies that can deserve and demand it, would be to adopt a premium pricing model. One thing is sure: agencies definitely need to move up the perceptual value chain, and be able to charge more, be it through commissions or fees. That is the only way they'll be able to secure a brighter future for themselves and their people!
Optimum Media Solutions