Agencies ponder over relative merits of commission-based and fee-based model.
Advertising agencies with more fee-based revenue models rather than commission-based accounts did better last year despite the slowdown. As clients cut advertising budgets, the commission reduced proportionately. Despite this, agencies are still undecided on whether it’s going to be more fees or higher commission in 2009 even as they start renewing their accounts or pitch for new ones.
Almost 90 per cent of multi-national corporations pay a fee, while most public sector firms continue with commission. Private sector firms have a mixed record. Media agencies generally prefer a fee. The fee is decided on the cost of staff required to service an account, time and effort plus overheads, while commission is decided as a percentage of the total budget.
A commission-based model, on the other hand, carries a risk factor since the client might increase or decrease media activity. The commission paid to creative agencies, which plan the ad, and media agencies, which place the ad across media has a big difference.
A decade back, when there was not much media fragmentation, a media agency did not have much to do and creative agencies held more prominence. Creative agencies used to get 12 per cent commission and media agencies would get 2.5 per cent. Even today, creative agencies get 10-12 per cent and media agencies 3-4.5 per cent.
“It depends on the clients and the practice they have been following so far, ” Prabhakar Mundkur, CEO, Percept H, said. Percept has always had some clients on fee and some on commission, almost a 50:50 split.
“I will prefer fee (if the client agrees), most media agencies will prefer fee. Fee-based model is cost-effective for clients as well. An agency working on commission might try to maximise the client’s spend to inflate its own commission, while the one working on fee will try and make the campaign as cost-effective as it can,” Chandradeep Mitra, president and head, Mudra MAX (media agency of Mudra), said.
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Mudra has a bias towards a fee-based model. Most of Leo Burnett’s accounts are commission-based. “Compensation is a long-term decision. It won’t be right to decide on the model on the basis of a six-month slowdown ahead. I would still prefer a commission. When the economy revives and budgets will increase, fee will look unwise,” Arvind Sharma, chairman and CEO, Leo Burnett India, said.
There are some clients who are asking for a reduction in commission and fee. However, there are others who understand that since there is already a cut on budgets, it will be unfair to ask for a reduction in fee or commission.
Sam Balsara, chairman and managing director, Madison World, adds: “Enlightened clients know that a reduction in fees/commission does result in a drop in services and quality since the agency is also a business house and not a magician.”
