This is the question that every marketing and procurement professional would like answered to help them manage their budgets.
What is included in my Advertising Agency Costs?
Marketing, creative and advertising agencies all have their costs of running a business. The call for more transparency around this has never been greater, as economic uncertainty puts marketing budgets under even more pressure.
Agencies often struggle to clearly explain the price put on the value of their services and talent. Leaving brands wondering if the price tag nets them the best possible value for money.
The truth is that advertising agency costs will be based on different vectors and considerations. Elements of their services are intangible – the thinking, planning and creative ideas – which can’t be as easily priced as tangible deliverables like assets, imagery, video etc. Advertising agency costs are also influenced by location, market, industry, experience and, of course, the price of doing business.
All advertising agencies costs will include staffing, overheads and deliverables. They also need to ensure they have a profit margin, so they can stay in business and continue delivering high-quality service to their clients.
But, with everything, when it comes to advertising agency costs the devil is in the detail.
How do overheads affect my Advertising Agency Cost?
Overhead expenses are defined as the agency’s business expenses that are essential to running the company. These include elements such as indirect payroll, corporate expenses, professional fees, travel costs, office space and facilities fees. Essentially all the costs to run the business.
An agency will factor their overheads into their fees, while they are essential to keeping the agency afloat, they still need to be reasonable and fair.
It’s an area that we actively encourage clients to dig deeper into. We encourage clients to ask questions about what is included in their agencies’ overheads – as it can differ wildly. If you don’t know what is included, how can you ensure that the charge is fair? But also, how can you compare against other agencies, and the benchmark data?
Another area that is often not scrutinised is profit margin.
Again, you want your agency to be making a profit, as that is how they continue to trade, to entice the best creative talent, and to innovate. We find this is another area that clients will gloss over, and not give too much attention to.
Ask the question to find out what their profit margin is, ensure it is outlined in your Scope of Work, proposal document and your contract. And then, make sure that you track this data throughout the lifetime of your agency relationship.
If your contract with your agency states their profit margin is 10%, then the metrics must prove that. You don’t want to find out at the end of the year that their profit margin is considerably higher.
There is no place for ambiguity when it comes to the finer details of agency fees, and yet we know that brands are still not requesting this information and aren’t monitoring it once the contract is signed.
There are two other cost points – direct client expenses and profits – that will start to build a complete picture of the elements that directly impact how an advertising agency costs out its services.
Is talent an expensive element of my Advertising Agency Cost?
The industry is currently talking about a ‘talent crunch’, as it seems like talented people are thin on the ground and, therefore, expensive to attract and retain.
It’s an interesting talking point, but where has this talent gone? We’re not seeing a big exodus from agencies, and when we talk to our clients they aren’t experiencing this crunch in reality.
Agency environments have always been high pressured and challenging, which means that amazing talent is costly to attract, develop and retain.
From the brand’s perspective, the cost of staffing is an entirely different metric. What you’re interested in is that the promised staff plan for your campaign is the one that will actually work on that campaign for the time assigned..
We find that legacy data is often used as a gauge to determine what level of agency staff will be needed to complete certain types of work. Those costs are factored into the advertising agency costs sheet without too much thought. However, this isn’t necessarily fair on either the agency or the brand.
What’s needed is transparency into staffing costs versus actual hours spent versus total cost to the brand. If both parties have visibility into this information, then it can minimise over or under payment for them both. Which means – total actual hours must be visible from the outset.
Benchmarking provides brands with essential insight when it comes to staffing plans and costs, and ensures that they are paying the fair market rate for agency services against the following metrics:
- The actual number of hours worked on the client’s account plus
- The actual number of hours worked on other client accounts plus
- The actual number of hours worked on non-client (agency) matters such as new business development, executive and administrative matters, but excluding holiday and sick time.
Total Advertising Agency Cost Example:
Sally is an agency employee earning an annual salary of $100,000. She works on your brand for 1,500 hours per year. But Sally also works for Client X, spending 300 hours for them, and 200 hours per year on new business, administration and training for the agency. Her total hours for the year come to 2,000 hours.
Sally is working 75% of their time on your brand. So you should pay 75% of Sally’s salary, or $75,000. Client X would pay 15% ($15,000). The remaining 10% ($10,000) should be included in the agency’s overhead as indirect salary.
Is there a set fee for Advertising Agency Cost?
When it comes to advertising agency costs, there is no one set fee or expected price point. There are too many variables in play. However, it is entirely reasonable to expect that these costs are broken down and made visible upfront.
Visibility is one thing. Contracts are another.
The issue we find, is that there is a lack of transparency around agency fees. And, it is entirely possible to overpay agencies by 25% or more, particularly if standard hours are used to measure agency compensation. It is essential that brands have access to accurate benchmarking data to change this dynamic, and provide clarity around the cost.
Brands must establish a transparent and information-rich contract with their agencies, that is consistent across their roster and clearly outlines every one of these costs, assessed against benchmark.
These insights will ensure that brands enter into agency contracts with a clearer eye on the services provided and how the costs are broken down. It will also give them the tools they need to address any issues upfront, and to use tools, like RightSpent, to assess these costs against global standards and expectations.