The Commission Debate – How do you pay your marketing company?

I was speaking to a photographer the other day and he asked me if it was OK to bill the client directly, or whether I would rather that he bill me so that I could add commission. This is by no means the first time that I have been asked this and it got me thinking about the different business models that marketing and advertising agencies use.

Sugar Bullet Marketing has always worked on a model where the client pays a fee for the work involved in developing marketing strategies and plans and on a retainer for managing those plans.  When it comes to buying media or working with external suppliers, these invoices generally go directly to the client and even if they come via Sugar Bullet, no commission is charged.

However, I know this is different from when I worked in a London agency where all the huge amounts of work done up front weren’t charged for, but then clients were charged commission on the media bought for them and any activities undertaken by external suppliers. I believe that now a lot of agencies will run a hybrid model where some projects are paid on a one-off basis, with commission payable on ongoing work.

For me, the commission model generally is flawed. This is why:

  1. Agencies can invest significantly for no return – They can spend days on developing work particularly for initial pitches, with no guarantee that the work will go ahead and they will get paid at the end of it. Sometimes my understanding is that whoever is going to win the pitch is also already pre-ordained, with companies only going through the pitch process so that they can be seen to follow due process or potentially because they want to squeeze their preferred agency to offer a better deal.
  2. Clients lose out – Because agencies end up doing quite a lot of ‘free’ work, it means that they then need to charge a high commission on any media they buy or activities they bring external suppliers in for (such as photography) to be able to make a profit. Some will argue that agencies get a discounted rate from the media companies/other suppliers so no-one loses, but my experience is that if the client paid directly it is likely they would end up paying less than they are being charged by the agency.
  3. Suppliers also potentially lose out –  particularly in the case of small suppliers.  If agencies are taking commission this is likely to mean that suppliers’ margins get squeezed, at the same time as clients potentially thinking that they are paying over the odds. In the case of the photographer, he did share with me a story where he afterwards found out that the client was being charged three times the amount the agency paid him for his work. I am not blaming agencies for this – if they have a three-way pitch for most accounts, that means that approximately 2/3 of the work they do up front is potentially wasted so they need to recoup their losses somehow.
  4. This method could potentially lead to bias – whether intentional or unconscious. You would like to think that agencies are media neutral and will propose the best plan for the client based on the client’s particular business, but there must be some temptation to propose activities that they know are more profit generating.
  5. Could this system can lead people to undervalue the strategic and creative process? By paying only when their adverts appear, do clients end up undervaluing the vast amount of effort that has gone into getting things to that stage? I have heard of too many small businesses (particularly in the creative fields such as designers and photographers) being asked to undertake work for little or no monetary compensation. There is clearly a lack of understanding of the amount of time, effort and cost (both fixed and variable) that are involved in producing great, creative work.

I realise that I am running a small business, and for me it is much simpler. I do not have huge overheads, so when I tell potential clients what Sugar Bullet will charge to develop marketing strategies and plans they don’t tend to fall off their chair in horror!  Then they benefit from paying for activities such as design, photography, media etc at the cost I am charged (including benefiting from any discount offered by media companies).

But regardless of size, charging a fair fee for the work undertaken, rather than taking commission on the ideas that come to fruition, seems to me the only way to ensure all parties are treated fairly. 

What do you think? Am I a naïve idealist, or is the commission model inherently flawed?

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