Marketing agencies’ compensation models represent a balance between the needs of clients who want to get the best return for their investment in advertising and agencies that must make a profit on the services they provide.
The top three payment structures used by marketing agencies in delivering their contractual services along with some pros and cons of such pricing models:
Commission Based Structure
The commission-based compensation model is a traditional method of charging clients involving the agencies receiving a fixed percentage of the money the client spends on media as a fee. This is called the “Agency Discount” which averages 15% of the media budget and is essentially a commission.
The role of an agency is to provide the services necessary to create and administer advertising campaigns. The commission-only model has become less popular since the 1990s, particularly for agencies handling the accounts of small businesses whose media expenditure may be small. But today, it is still very common and is often a part of a hybrid model of pricing, or possibly one of many options an agency might offer a client.
Some benefits of the commission-based compensation model include:
- Agency is motivated to generate results for the client, as they will earn a higher commission as a result.
- Clients are required to pay the agency for the results they produce and hence, it is a cost- effective model.
- This model offers flexibility for the client, as they can adjust the commission structure based on their specific needs.
Some potential drawbacks of the commission- based compensation model include:
- Agency is only motivated to generate sales or revenue in the short-term and lacks the long term commitment.
- The amount of commission earned by an agency is sometimes affected by external factors. It can lead to unpredictable revenue for the agency.
- It can lead to a conflict of interests between the agency and the client, as the agency may prioritise their own interests over those of the client.
Project Based Compensation
Project based payment structure aka fixed pricing model refers to a pricing model where the agency charges the client a fixed price for a specific advertising campaign. The project fee covers the time and costs of a specific campaign or all work completed during a specific period of time.
Fixed-pricing is very common with limited-scope advertising campaigns or projects such as website development, etc.
Some benefits of the project-based compensation model include:
- It sets clear expectations for both the client and the agency, as the scope of work, timeline, and budget for each project are well-defined. It is cost-effective for the client, as they only pay for the specific projects they need, rather than paying a retainer for ongoing services they may not use.
- Both the client and the agency can agree on specific projects and terms for each project, rather than being tied to a long-term contract.
Some potential drawbacks of the project-based compensation model include:
- It only engages the agency for specific projects rather than long-term commitment from the client.
- It can lead to increased competition for the agency, as other agencies may also bid for the same project.
- The agency has to continually adapt to new projects as relationships between the client and the agency lack continuity and consistency.
Retainer Based Pricing
The Retainer compensation model refers to a model where the client pays the agency a fixed amount every month, quarter, or year to the agency for marketing services. In this model, agencies act as an extension of the internal marketing team. It can be a good solution for clients that require ongoing support and services, and for agencies that are looking for stability and predictability in their revenue streams. However, the success of the model depends on clear and agreed-upon expectations, and the ability of the agency to deliver consistent results.
Some benefits of the retainer compensation model include:
- It provides the client with ongoing support from the agency, as the retainer fee covers a set amount of work or services.
- It provides the client with ongoing support from the agency, as the retainer fee covers a set amount of work or services.
- It allows the agency to focus on strategic planning and long-term goals, as they are not solely focused on delivering immediate results.
Conclusion
In conclusion, commission-based, project-based, and retainer-based pricing are three of the most commonly used compensation models in marketing agency-client relationships. Each model has its own unique benefits and drawbacks, and the best model for a specific client will depend on a variety of factors, such as the type of services the agency provides, the client’s budget, and the client’s goals and objectives.
