Recently, an agency client wondered whether their billings for professional fees (what they keep to strategize and run programs for clients) were in line with the clients’ ad spend. Were they charging too much? Too little? Were they at risk of losing clients because of it, or were they leaving money on the table?
These are important considerations, yet questions regarding agency management fees don’t have simple answers; instead, the answer varies from agency to agency and, potentially, from client to client within that agency.
The landscape has changed dramatically; more and more clients are allocating more and more of their budgets to digital services and advertising. In speaking with this agency client, I wanted to be clear from the very beginning that there is no go-to ratio when it comes to agency management fees vs. ad spend.
For example, I have some agency clients whose fees are five times a client’s ad spend. That may sound like a lot, but it’s perfectly fine if the strategic work and outputs for those fees give the client an ROI that makes sense. Clearly, those clients are happy with the arrangement or they would take their business elsewhere.
5 Factors That Impact Agency Management Fees
Observatory International outlines five key factors that can impact agency management fees, and I completely agree:
1. Scope of the Work: Agencies often spread themselves thin to cover all the bases for a client. The extra channels and platforms available today can considerably increase the scope of a project.
2. Agency Model and Roster Structure: “In a centralized agency model the fees will generally be a lower proportion of spend than in a decentralized agency model.”
3. Marketing Mix: How much of the project is ATL and how much is BTL? The higher the engagement or level of contact the agency must make, the higher the fees can be.
4. Commercial and Marketing Objectives: “For example, if a company is trying to build its digital platforms or sees a market opportunity to invest ‘ahead of the curve’ and makes significant media spend available—both of these could alter the ratio.”
5. Variances in Accounting and Reporting: What items does the client include in their marketing budget? This can make the size of the budget vary wildly.
Fees + Percentage of Ad Spend Model
I asked my agency client if they were currently incorporating (or planning to incorporate) a fees plus percentage of ad spend model. Typically, this is how it works:
• Agencies charge their set fees;
• They propose an ad spend allocation (or the client provides one);
• The agency takes about 10 percent of that spend, depending upon the factors mentioned above.
This way, there’s more incentive for the agency to keep doing great work even if their own fees remain the same. After all, the better results a client gets, the more likely they are to maintain or increase their ad spend budget. This improves the client’s confidence in your agency, and you end up making more in the long run—as the client builds their business and makes more, too.
Follow-Up Questions and My Responses
Q: Is it customary to be upfront about the 10 percent and position it as you outlined?
A: It’s 100 percent customary to fully disclose the 10 percent for paid search (though some agencies go as low as five percent and others as high as 15 percent on this). Staying open, honest, and clear is an essential part of a healthy relationship with your client. I can’t think of any situation where it would be appropriate to hold this information back.
Q: Our programs are generally focused on paid social, which some people say doesn’t get “commissioned.” What are your thoughts on that?
A: For paid social, you have to consider these two things, among others:
• Your Leverage: Are you their top choice going in? If so, you’ve got more bargaining power. If not, you may need to make concessions.
• Relationship with the Client: Is this a new engagement that could lead to more work, or an existing client that’s bringing you in for paid social for the first time? Do you have something to prove to this client regarding your ability to deliver results in this way?
I can’t say paid social is never commissioned, because it’s all in how you position it from the onset. If that’s a sticking point during negotiations, you have the ability to reduce or eliminate the percentage without reducing your agency fees.
As I said, there’s no magic ratio for ad spend vs. agency management fee. It all comes down to ROI, so it’s essential to track clicks, sales, phone calls, and more. The more business your clients receive from the advertising, the more willing they will be to create a bigger budget and allow you to take a larger percentage of it. If you have any questions, feel free to comment below or let’s talk.