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What is the best media agency fee model?

When it comes to paying your media agency, are you using the old school commissions system? Or the mainstream retainer model? Or have you gone for a performance or pricing approach? The fact is there are many ways to pay your agency fees. And we explore them here in Media Minutes.

SCRIPT

DARREN: Welcome to Media Minutes. I am Darren Woolley
STEPHEN: And I am Stephen Wright
DARREN: In the next few minutes we will share with you our view on what is the best media agency fee model. Stephen?
STEPHEN: As you know Darren, traditionally media was paid using a media commission system. This was a model in place for more than a century, where the media owners paid a commission to the agency as accredited media buyer.
DARREN: But accreditation was dismantled in many markets late last century.
STEPHEN: That’s right Darren. But the commission system is still alive and well, especially in many of the digital media channels. Of course, many advertisers have negotiated for their agency to return some of all of that commission to the advertiser in pursuit of media transparency.
DARREN: Which is why we see the dominance of the retainer model, right?
STEPHEN: Yes, Darren. The retainer model is very popular. This is where the advertiser pays a retainer to retain a team of agency resources to provide media services based on salary costs and agreed overhead and profit margins.
DARREN: Well, that sounds fairly straight forward to me.
STEPHEN: It is Darren, and quite popular. But there are issues with the retainer model. The first is that it is under pressure because most advertisers are trying to reduce their agency cost. In the highly competitive media market, agency salaries, overheads and profit margins are under enormous pressure.
DARREN: But that is true everywhere, isn’t it?
STEPHEN: Yes, but the other problem is retainers provide agencies certainty of revenue, but they become difficult to flex with the changing needs of the advertiser, as the recent pandemic proved.
DARREN: Well, COVID has had an impact on everyone, right?
STEPHEN: Yes, but while some advertisers had to cut their spend, a few increased their spend significantly to take advantage of the media market. Either way, the agency retainers were locked in place.
DARREN: Yes, very true Stephen.
STEPHEN: Therefore, as advertisers and their brands find themselves pivoting to the new realities of the marketplace, many advertisers are looking for agency fee models that provide flexibility and value.
DARREN: Is this were I say, “You mean performance and value-based fee models?”
STEPHEN: Correct, Darren. This is an increasing interest in finding ways to incentivise media agencies, not just for doing their jobs better, but for their contribution to generating revenue growth and value.
DARREN: So, Stephen, what is the solution?
STEPHEN: Many advertisers are looking to include performance and value-based fee models into their agency remuneration. This includes reducing reliance on wholesale retainers and including a significant component based on value contribution and sales performance.
DARREN: Sounds like a positive move for the agencies.
STEPHEN: Well it can be Darren, if the fee is modelled correctly. The problem for the agencies is in moving from the certainty of the retainer, to the upside of a performance or value model can create significant uncertainty.
DARREN: But the good media agencies would want to be rewarded for a job well done.
STEPHEN: That is true Darren, but as we have seen it is a delicate negotiation moving both agency and advertiser to a better and more accountable value and performance fee model.
DARREN: Thank you Stephen. And to get more value, make sure you subscribe to Media Minutes. A weekly snack on all things media. Until then. I’m Darren Woolley, and he’s
STEPHEN: Stephen Wright
TOGETHER: And this is Media Minutes.