Last editedJun 20233 min read
Fees, retainers, commissions – ad agency payment terms are as varied as approaches to marketing campaigns. If you’re a marketing professional, you’ve probably come across many different industry strategies and standards. So, how do ad agencies get paid by their clients? Here’s a breakdown of the most common ad agency payment models, along with their pros and cons.
How are ad agencies paid?
There are five main types of ad agency payment models, outlined below. While some ad agencies will stick to just one pricing model or strategy, others will offer clients a variety of fee structures and services.
1. Commission-based payment model
One of the most traditional ways to get paid, commission-based pricing is still frequently used. With this model, the client sets a budget for media spend. The agency takes a cut – usually 15% - of whatever the client spends on media campaigns. For example, imagine that a client agrees to pay $20,000 for television advertising. The ad agency would take its 15% fee for a total payment of $3,000, with the remaining $17,000 going to the TV network.
Benefits of this model include predictable income for the ad agency. The terms are very clear, and payment is made regardless of the campaign’s success. Payments are handled by the media station rather than the advertiser. This model won’t be right for everyone, however – it’s best suited to traditional campaigns with larger budgets. If the media budget’s too small, it may not cover the campaign’s production cost.
2. Hourly rate payment model
Another popular ad agency pricing model is a standard per-hour fee. The agency charges a fixed rate for its services, tracking time spent throughout the project. The client is typically invoiced at the end of the project, or at set intervals for longer-running campaigns. For example, if the agency charges $100 per hour, the client would be billed $5,000 for a 50-hour project.
This is a straightforward pricing model that’s easy for both client and agency to understand. It’s also beneficial for the agency if the full scope of the project isn’t clear at the outset. This ensures you get paid for every hour spent working.
3. Retainer-based payment model
A third option is payment on retainer. In this case, the client pays the agency a fixed fee at regular intervals to retain their services. For example, imagine a marketing agency charges $1,000 per month to handle social media accounts. This is a flat, fixed amount for a specific ongoing service provided on retainer. Its primary benefit is predictability, though it’s important to manage expectations so that both parties understand what services are being provided.
4. Project-based payment model
Project-based pricing is similar to charging by the hour. The difference is that the agency charges a fixed price for the full project, rather than for hours spent working on it. This requires a concise budget and discussion of what’s involved with the project. Both parties must agree to all terms and conditions before the project begins, including the timeline, services, platforms, and scope.
This model works best for simple projects like website development or display advertising. It offers predictable income for the agency and transparency for the client. The downside is the potential risk of scope creep or late payment from the client.
5. Value-based payment model
With more metrics to track than ever, an increasing number of ad agencies are turning to incentive or value-based payment models. These systems track a campaign’s metrics to award payment depending on performance rather than standard hours. Examples include things like market share, sales, or page views.
Are ad agencies paid in advance?
This depends on the payment model chosen. Commission and retainer-based pricing models usually involve some advance payment. Many agencies will also ask for a deposit to mitigate the risks of project-based pricing. On the other hand, options like value-based and hourly pricing models will involve invoicing once work is complete.
Which ad agency payment terms are right for you?
The right model depends on the size of your agency, the types of services you provide, and your client expectations. Many ad agencies choose a hybrid system. You could charge a per-project fee for one-off tasks, with retainer or value-based pricing models for ongoing campaign management over time. Finding the right fit will depend on your cash flow needs, project costs, and other factors.
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