When should an advertiser pay pitch fees when selecting a new advertising agency?

There are times when an advertiser should go to the market to select a new agency. But this is not a process that should be entered into lightly. Going out to the market place comes with several risks and costs to both advertisers and their agencies. Before we consider if the advertiser should pay pitch fees, lets look at the cost to the agencies, which include:

Internal agency human resources

Like most companies these days, agencies do not have a significant capacity within their human resources for speculative work. While few agencies appoint external staff for a pitch, the head hours invested in the pitch process is a cost to the business, with the majority of the costs quoted for the pitch process comprising these human resource costs.

Disruption to the agency

The opportunity to participate in a pitch can be great for agency morale, but many agency managers are rightly balancing the potential upside of chasing new business opportunities with the impact the disruption may have to existing clients.

Non-recoverable external costs

Depending on the size of the account, many agencies will invest heavily in external costs such as consumer research, animatics, external artwork and the like to provide a perceived competitive advantage. If the agency is unsuccessful, these are hard costs that will never be recovered and even if they are successful, it can take many months to get back to break even.

Intellectual property rights

The core value an agency provides is the ability to generate ideas. In many cases advertisers require the agency to assign the rights to these ideas to the advertiser as part of the pitch process. If you were not intending to use the idea why would you want to own it? And if you do intend to use the idea, why would you not pay for it?

Industry perception of failure

While the successful agency wants to shout their success from the roof tops, the unsuccessful agencies are naturally concerned that a number of unsuccessful pitches can create a perception that the agency is “off the boil” with little or no opportunity of putting these losses into context as they are often covered by confidentiality agreements.

When to pay pitch fees

There are times when you should compensate the participating agencies for their costs. Our advice is to offer pitch fees when:

  1. you want to buy the rights to all concepts, not just the winning concept,
  2. when you require the agencies to prepare materials and incur external costs beyond what would be considered standard
  3. if you are engaging a large number of agencies in the strategy / creative stage of the process.

How much should you pay

That is obviously open to negotiation with the agency. Too little and the fee becomes token and potentially insulting. Too much and you are simply wasting money. But if you are simply paying out of pocket expenses then as a guide $10,000 – $25,000 per agency would be reasonable and if you are buying their intellectual property rights then the commercial value is easily $100,000 +.

Have you ever paid pitch fees? Or been paid pitch fees? And what was the fee for? And how much were you paid?

Leave a comment here. We do not need to know who the companies were. Just the facts.