when they sprang up as sales representatives for newspapers and magazines. As sales representatives for the media, they kept a 15 percent commission on the amount of money advertisers spent with them in the media they represented. Thus, an advertiser might spend $1,000 for ads in a magazine and the agencies would keep $150 and give $850 to the magazine. As time went on, the agencies got close to their advertisers and began to create advertising for them and to advise where to place it. The agencies maintained the practice of keeping 15 percent of the amount the advertisers spent in the media through the late 1980s, when the agency business began to change as more and more independent agencies were purchased by large agency holding companies such as WPP, Omnicom, Publicis, IPG, Havas, and Dentsu. As competition for large accounts intensified, the holding company agencies began to compete for business on price, or lower commissions and fees. The fierce competition among the holding company agencies accelerated a trend of decreasing commissions. This trend was acerbated by large advertisers that often turned over the negotiating of agency commissions and fees to their purchasing departments, which brought on the use of negotiated fees based on scope of work (SOW).
Agencies also make money by adding a 15 percent commission to the material, services, and production they purchase for a client, a practice that is referred to as grossing up a charge. For example, if an agency purchases $850 worth of photography for a client, it would gross it up 17.65 percent (or multiply $850 by 1.1765) and charge the client $1,000. (You may recall from basic high school algebra that you cannot take a 15 percent discount off the price of some product and then multiply the discounted price by 1.15 to get the original number; the two values will not be equal. For example, 15 percent less than 100 is 85, but 1.15 times 85 equals only 97.7.)
Fee arrangements
Advertising agencies are service businesses and their expenses are mostly for people: copywriters, designers, art directors, media buyers, media planners, account management people, and so forth. The fees ad agencies charge are typically based on the following: (1) a monthly retainer fee against which media commissions are credited, (2) an agreed‐upon charge per hour for work performed, or (3) a complex formula related to the amount of work the agency performs for a client as a percentage of the agency's total overhead. One reason that the fee arrangement is preferred by many advertisers is that they do not want their agency’s income to depend on how much money they invest in the media. Advertisers want to make sure the agencies place their ad dollars as efficiently as possible and that the agencies buy the most effective, not necessarily the most expensive, media.
Agency structure.
Advertising agencies vary in size from large conglomerates with more than 50,000 employees in offices throughout the world and with media billings in the tens of billions of dollars to local, one‐person agencies in smaller towns with media billings in the thousands of dollars.
Basic functions.
The work in the typical agency is broken into three basic functions: creative, media, and account management. These functions are supported in larger agencies by plans groups and by research, production, traffic, and accounting departments:
The creative function is handled by art directors, copywriters, and creative directors who create advertising. Typically, the account executive will present a client’s advertising problem to the creative group, normally an art director and a copywriter, who will mull it over and then recommend an overall campaign or a single ad or commercial approach. Ideas are often the result of brainstorming among art directors, copywriters, account people, and media people in the agency. The account executive then will present the idea to the client. If the client accepts the approach, the creative people will proceed to create the advertising and arrange for its production.
The media function is carried out by media planners, media buyers, and media directors who evaluate media and place advertising. Planners recommend what media and how much of each should be used. Media buyers evaluate and select which digital platforms, networks, stations, magazines, newspapers, or websites to buy; and they are the people on whom media salespeople typically call on. However, in recent years planners have become more important in the evaluation process and salespeople have been calling on planners more often in order to get ahead of the process.
Media departments and media agencies are organized in various ways depending on the agency. Some are organized by product, and buyers buy all markets around the country and the digital platforms for a certain product or brand. Other agencies organize on a regional basis and have buyers specialize in buying one or more markets for all of the agency’s products. Furthermore, large media agencies usually have buyers who specialize in a particular medium: network television buyers, spot television buyers, radio buyers, print buyers, and digital buyers, for example.
The account management function is carried out by account executives, account supervisors, and management supervisors who are the primary contact people between agency and client. The account management team usually solicits clients and services them once they are signed up.
Digital agencies.
A digital agency is one that specializes in creating and placing advertising in the online media. Large, multinational, conglomerated agencies, such as WPP, typically have divisions that specialize in online advertising. Buying digital advertising, including search advertising, is quite complex and requires special, often highly technical, expertise. With the growth of programmatic buying, there are also media agencies that specialize in buying programmatically, and these are called trading desks. The largest agency holding company, WPP, has a trading desk, Xaxis, that buys programmatically for over 3,000 clients.30
Television bias
In most large‐ and medium‐sized agencies, there is a bias in favor of television in general and network television in particular. A typical large national advertising agency might place up to 40 percent of its total US media dollars in broadcast network television. The reason advertising agencies try to sell the benefits of letting their agency handle the advertising for large users of network television (both broadcast and cable) is because if clients can afford the networks, they will generate large fees, especially production fees for commercials. The media department likes to buy network television because it can spend and administer huge amounts of money with fewer people than it would take to place a similar amount of money in, say, lower‐priced radio advertising.
Moreover, creative people do not get higher‐paying jobs by producing beautiful newspaper ads or static banner ads; they move up the ladder to become high‐paid creative directors by developing a reel of award‐winning television commercials.
However, the network television bias is eroding as television network audiences shrink and as millennials cut the cord of cable television and watch streaming entertainment and sports content on their smartphones and smart TVs connected to the Internet. Furthermore, with digital advertising’s ability to precisely target individual consumers, the appeal of broad‐reach, non‐micro‐targeted television advertising has diminished for many marketers.
Selling to agencies
Advertising and media agencies are typically efficiency oriented and require a service‐oriented (farmer) salesperson who understands and is experienced operating in a numbers‐ and data‐analytics‐oriented selling environment. Most advertising agency buyers do not care much about results; they are
