Advertising Agency Fee Structures

Advertising agencies work with client companies who pay them to design, develop and deliver ad campaigns through mass media. As a service provider, agencies typically use one of several common fee structures to bill clients for their work. Each method has strengths and weaknesses.

A commission-based structure is the most traditional approach to ad billing. The agency simply takes a percentage commission based on the media budget for the campaign. A 15 percent commission is the norm, meaning that the ad agency gets 15 percent of the total spent on the ad campaign. While this method is easy to implement, it has become less common in the early 21st century because of its potential for conflicts of interest. It provides an incentive for agencies to recommend more expensive media options such as television and major magazine ads.

The mark-up fee structure is used by promotional types of agencies that contract visual designs, researchers or print shops on behalf of clients. When hiring these external facilitators, the agency adds a mark-up to those costs as their fee for coordinating the work. The standard mark-up is 17 to 20 percent.

Fee-based structures are controversial, but often preferred by advertisers. This is where the agency and client agree to a per hour rate for various activities, such as creative design and media buying, or a project fee for an entire campaign. Clients like the idea of knowing what they will pay ahead of time, but agencies note the difficulty in accurately predicting how much time and expense it will take to complete the work. Some contracts allow flexibility for additional purchases or work.

A more contemporary approach is for agencies to accept an incentive-based structure. This is where the advertiser and agency set campaign goals, such as increased awareness or sales growth. They then determine how to evaluate ad success and agree to compensation that aligns with performance metrics. Agencies were against this approach in the past, but have been more accepting of it if goals relate closely to things within the agency's control. Agencies can influence brand awareness, but can't overcome lack of interest in an unimpressive product.