The Cost of Media Services

What should your agency charge for media services?

I watch my mailbox pretty carefully. Reader feedback gives me quite a few ideas for columns. After getting no less than three questions this week concerning what an agency should charge for media services, I realized I’ve never discussed agency compensation in detail in a column, so I’d like to offer my two cents worth.

Compensation for media services in an interactive agency is always a subject of debate, especially when you consider a typical client: a dot-com company struggling for profitability. Some clients may even propose paying for your services with stock! Some consider this a terrific situation while others look at it as unnecessarily risky. Whatever your stance on this issue, remember that your media department should ideally be a major profit center within your agency.

Two models were adopted very early in the history of interactive agencies: the commission model and the retainer model. Here are some pros and cons of each:

The Commission Model

Many interactive agencies like to be compensated with a 15 percent commission on all media placed, much like some of their traditional media predecessors. And when clients are spending money, the 15 percent commission structure is unbeatable.

However, this doesn’t work for all clients. As the amount of effort spent by staff during the plan maintenance and optimization phases increases, 15 percent begins to look less attractive. And in the case where smaller clients are spending less than $100,000 a month or so, agencies on the 15 percent model are put in situations where they have the potential to lose a lot of money.

The Retainer Model

Retainers often seem like a good idea. They allow your agency to cover its costs on almost any work, including media campaigns. Retainers are typically calculated based on a scope of work from a client, coupled with estimates of man-hours and staffing needs for that scope of work. From this, a monthly fee is arrived at, marked up, and proposed to a client.

Sounds great, but retainers take away any chance for an upside for your agency. If your client decides to spend more on online media, you’ll have to either renegotiate the retainer or simply grin and bear it.

So, how should your agency propose to be compensated? I recommend this exercise…

First, develop a spreadsheet with a list of your various staff members and their salaries (converted to hourly wages). Multiply these wages by three – this is a good rule of thumb for calculating overhead and other hidden costs. Use timesheets submitted on past projects to estimate time that will be spent on a given scope of work. Using the spreadsheet, calculate your agency’s cost for pre-planning, planning, negotiation, plan presentation, buy maintenance, optimization and any other services you’ll be performing. Write down the final cost. This is your break-even point.

Once you have a break-even point, you can calculate a retainer, a commission, or a combination of the two. I like to combine the two in order to make sure my agency’s costs are covered, but I also make sure that I have a significant upside if the client decides to cut a $15 million deal with a portal.

I like to propose a 15 percent commission, with a minimum monthly fee. My minimum monthly fee is my break-even point, prorated over the months it will take to complete the work. Fifteen percent is usually pretty easy for clients to swallow. It’s transparent to the client if you negotiate all of your rates and present the sum as “gross media spending.” And the 15 percent will give you one heck of a boost when your client decides to do that multi-year portal deal. At the same time, the minimum monthly fee will save your butt if budgets get slashed, or if there are months in which the client doesn’t spend much money on media weight, due to seasonality or other factors.

If you do consider a proposed “equity for services” barter arrangement, I recommend making sure that the stock is a component of the upside. Make sure your agency’s costs are covered by cold, hard cash before taking risks on a new dot-com company.

Follow these simple guidelines and your media department will contribute more significantly to your agency’s bottom line over time.

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