448 The Marketing Book
unchanged, and the client was £300 better off. It
is hardly surprising that powerful clients con-
tinue to press for rebates.
The implications of rebating are less severe
for media independents, who offer no ancillary
services to their clients, generally have lower
operating overheads, and can earn substantial
volume discounts to offset against rebates by
virtue of the large sums they spend with the
media as a single buying point for a number of
separate advertisers.
Clear as the dangers of rebating are, there
is a case to be made for it. The crux of the
argument is the size of the advertiser’s budget.
There can be no doubt that a £1 million national
television campaign does not incur 10 times the
creative and administrative costs of a £100 000
poster campaign, let alone 100 times those for
£10 000 worth of regional press advertising. On
that basis, it is not unreasonable to expect
agencies to be satisfied with remuneration that
diminishespro rataas spending increases. If one
of them takes the initiative by charging a client
less than the actual price of media bought, the
argument goes, it has done nothing more than
reduce its service charge to an amount that
matches the work done.
The debate is likely to continue. Mean-
while, a pan-European research study (Euro-
pean Association of Advertising Agencies,
1994, pp. 5–7) found that 16 per cent of
responding agencies had rebated in 1989, and
17 per cent in 1992.
Industry commentators regularly assert
that payment by fee, the amount being prefer-
ably linked to results, is replacing the anachro-
nistic and perennially controversial media
commission system. Like their statements
about rebating, this claim requires closer
inspection. A fee system does have the obvious
appeal of reflecting pragmatic reality instead of
historical precedent and legal convention, but
agencies seeking to implement it have to
surmount several practical obstacles. First, they
will continue to receive the media commission
discount. It does not have to be claimed, and
media owners would be unwilling to make
special billing arrangements for a few agencies.
The discount accumulated therefore has to be
calculated for each client periodically, and a
credit issued against the fee. A new internal
data-handling system will probably be needed
to accomplish this. Deciding the amount of the
fee poses a second set of problems. Like setting
a price, the process demands identification and
isolation of the costs to be offset and decisions
about the margin required. The calculation will
have to be based on past costings, or on
forecasts. In either event, the process is notori-
ously like trying to steer a car by looking in the
rear-view mirror. When each fee is renegotiated
at the end of a budget period, the client is likely
to exert strong downward pressure. That will
produce the same consequences as rebating, if
the agency gives in. Moreover, other fee-
charging agencies are free to start price wars.
Lastly, if the fee is to be pegged to results, the
agency will face the considerable difficulties
involved in measuring them and isolating those
attributable to the advertising campaign.
Furthermore, advertisers and media own-
ers both have a vested interest in retention of
the commission system. The former have rea-
son to suspect that a fee set on the basis of
overheads, salaries, production costs and a
reasonable profit margin would be a larger
amount than 15 per cent of media bills plus
17.65 per cent mark-up on non-media work
plus chargeable costs. The latter value the
control that progressive reduction of the com-
mission percentage gives them over their own
cash flow, and would much rather deal with a
small number of advertising agencies than a
large number of advertisers.
It should therefore come as no surprise
that a recent survey of 450 advertisers across
Europe concluded only that ‘the old standard
of 15 per cent commission has been replaced
by lower commission [meaning rebating], fees
and – increasingly – payment by results’
(Lace, 2001). In the USA and Japan, too,
advertising agencies earn their income from
this same combination of three sources, plus
the 17.65 mark-up on subcontracted services.