How does an ad-buyer make their money?

February 17, 2012 11:30 AM

How does an ad-buyer get paid in an agency? And how does that information get relayed to the client?

My understanding is that ad-buyers you tack on a set percentage on top of the cost of ads, right? (If i'm off base, let a brother know!) If you bake your costs into the ad-buy itself, how do you report it to the client? For example, if you buy $10,000 worth of IOs, and you charge a 20% mark-up, do you tell the client that they paid for $12,000 in ads? Does the client know the percentage markup? Is there an industry standard (like how an actor's agent always makes 10%) or is it negotiable?

Thanks so much for the help!!

posted by rev- to work & money (3 answers total)

I thought agencies always separated the actual cost of the engagement from the ad buy. That way how much the buyer is getting paid is not an issue, as the month to month contract covers everything from actual project activities to executive oversight and strategy to overhead (rent, etc.) and, ideally, profit. But the ad spend is a separate line item.
posted by KokuRyu at 12:02 PM on February 17, 2012

That was how the media department (ad buyers and planners) used to get paid for their work in advertising agencies. It was a commission type of model where the client would pay a percentage over and above the cost of the ad space. The industry standard used to be 15% pretty much across the board.

It should be noted that this was not always an "extra" cost to the clients. Decent sized media suppliers (TV networks or national magazines for example) would have two rates. Gross (standard rate for anyone who calls to buy) and Net which was 15% lower and only given to established ad agencies (hence the "commission" terminology). Media suppliers preferred dealing with agencies who knew what they were doing and this rebate was also a thanks for throwing business their way. So the agency "pocketed" the 15% and only paid for the net ad space. But the client benefited as well since they would have paid the gross rate anyways if they booked directly. And of course they gained from the expertise of the media department in choosing the right media to buy to deliver on their campaign objectives.

Nowadays it's quite different. The buying and selling of media has become quite a commodity. Agencies started lowering their commission rates to clients to become more competitive. Some big media shops charge as little as 1-2% commission. This is only offered to clients with massive media budgets though. Very few clients and agencies work on the 15% gross model anymore (I only have one in my stable of clients). And fewer media even offer gross vs. net rates.

Full service agencies which offer more comprehensive strategic planning in media are more likely to charge on a set fee basis for a campaign or on an hourly rate for work done. This would be itemized on the agency invoice. The media or ad space would be charged separately.

In terms of what the client "sees" on his invoices, this is usually established up front in terms of how the agency is getting recompensed. If it is on the older 15% gross model, the client would usually only see the one amount - which would include the ad space cost and the commission in one lump sum.

Oh, I am a media planner in a mid-sized agency in North America (I plan what the media buyer buys).
posted by mephisjo at 1:03 PM on February 17, 2012

The old industry standard was for advertisers offer agencies a 15% discount off of published rates. Now, anyone can get this discount by asking for it, so it amounts to a 15% commission for ad buyers. But it won't always, or even usually, be reported that way to the client.

As to how the buyers get paid themselves by the agency, this varies. Sometimes the buyer is on staff and paid a salary. Sometimes they'll be contractors and charge a flat fee, or a percentage of the commission, or an hourly rate.

Under the old model, an advertising agency would use the 15% commission from the ad buy to fund creative development and production for the ad campaign. But this is increasingly the exception, not the rule. Some clients ask for, and get, the wholesale ad pricing as a line item, with all costs handled on a project fee or monthly retainer, or hourly billing. Others pay some of both types of costs.

Now that the 15% discount really isn't restricted to agencies, ad buyers typically pitch their value in terms of their ability either to bundle multiple clients for volume pricing, or to aggressively negotiate with publications for additional placements or impressions to be included in the buy.

So a typical report to a client from my agency might say that the client owes $100k for advertising valued at 125k with additional freebies thrown in, plus a 20k project fee. The agency hopefully paid less than 100k for the advertising, and manages to book some profit there as well.

Clients will sometimes specify at the beginning of the engagement that the agency must hit certain CPM (cost per thousand impressions) or CPC (cost per click) targets, which may involve the agency passing through some or all of the agency discounts in order to be able to hit these. In rare cases, the agency may even be incentivized to hit certain targets in terms of percentage increase in sales, or leads, or whatever metric is mutually agreeable, as a result of the campaign.

There may also be various reasons, especially related to tax benefits, internal budget allocations, or internal politics, why clients may prefer more or less transparent pricing, and more or fewer costs upfront or on the backend. Agencies will also have different preferences based upon whether they are primarily an advertising agency, or a digital, or brand, or public relations agency that also offers ad buying services.

Bottom line: there are many of different ways that ad buyers are currently being compensated in the market, as this is a space in a fair amount of turmoil currently. (I work in a brand agency that will sub-contract media buying services).
posted by psycheslamp at 1:18 PM on February 17, 2012