Promotion 447
that it is in fact standard: a figure which makes
the agency’s reward for commissioning and co-
ordinating the subcontract the same as it would
be if the supplier’s bill had been discounted by
15 per cent. In other words, it derives abso-
lutely directly from the media commission
convention.
Example 2 in Crosier (1998b) illustrates the
required arithmetic, and shows that the X per
cent referred to in the IPA’s guidelines will be
17.65 per cent. This unexpectedly precise figure
is confirmed by the European Association of
Advertising Agencies (1994, p. 21): ‘In addition
to the agency retaining 15 per cent on the gross
media billings, it is normal practice for all...
outside purchases which are billable to be
charged at cost plus 17.65 per cent.’
Thus, the normal pattern of remuneration
for a conventional advertising agency is a
combination of a 15 per cent commissiondiscount
allowed by media owners on the price of
advertising space and time bought on behalf of
its clients, plus top-up feesand a 17.56 per cent
mark-upon subcontracted services, paid by the
clients themselves. The first of these has always
dominated, in Britain, America and elsewhere.
Various industry estimates suggest that it
accounts for somewhere between two-thirds
and three-quarters of a typical advertising
agency’s total remuneration. In the case of
media independents, the proportion is of course
virtually 100 per cent.
Whereas an agency could negotiate the
level of a service fee, its earnings in commission
and mark-up are limited to a fixed proportion of
the amount a client is willing to spend on
advertising media and ancillary services. Effect-
ively, agencies can compete for business only on
such non-price dimensions as experience and
reputation. In practice, however, some will offer
commission rebatingdeals as a ploy to win new
business or retain a client threatening to move
the account elsewhere. Indeed, the impetus may
come from a high-spending client expecting to
benefit from the economies of scale.
Commentators routinely describe this
arrangement in terms that imply an entirely
impossible mechanism, reporting that an
agency has agreed to ‘cut commission’ to less
than 15 per cent or ‘hand back’ some of it to the
client. Agencies cannot in fact reduce a discount
awarded automatically by media owners, and
there would in any case be no benefit to the
client if they could. Nor can they hand back a
sum of money that exists only as a discount, let
alone to a third party who did not give it in the
first place. Such mistakes are not simply care-
less, but downright misleading.
Example 3 in Crosier (1998b) explains the
mechanism for an agency to allow its client a 3
per cent rebate. What actually happens is that a
second discount in the transaction leaves the
agency’s commission intact but has the same
effect asreducing it. On the face of it, a 3 per cent
discount is hardly generous. Shoppers would
not see it as a bargain at the sales, and traders
will regularly deduct 5 per cent for cash in
hand. However, on a total expenditure of
£10 000, the profit is now £1200 instead of
£1500. The difference of £300 is exactly a fifth of
the unrebated figure, and the agency’s conces-
sion to its client has reduced its earnings on the
transaction by fully 20 per cent. Given that net
profit margins are typically around 2 per cent,
according to conventional wisdom in the indus-
try, such largesse is clearly unsustainable. At
the height of a rebating boom in the 1980s,
many rebaters landed themselves in a serious
financial predicament, and have had to make
up for lost revenue in some way, such as by:
cutting corners on creative work for the client;
recommending unnecessarily expensive media
schedules; proposing extra add-on services;
claiming more top-up fees; cutting back on the
account-handling service; or cross-subsidizing
from other clients. On the other hand, the trade
press reported that others had lost multimillion
pound accounts by refusing to do so. Yet,
clients who demand rebates thus commit them-
selves to a game of swings and roundabouts,
and the long-term outcome can only be damage
to the business as a whole. That said, the
agency was the only party to suffer financially
in Example 3. The media owner’s revenue was