I have been teaching the AE Bootcamp and Advanced AE Bootcamp for over a decade, and one of the things that always surprises me is how few AEs understand how to calculate advertising agency commission rates on media buys.
When the rate calculation is incorrect, it can cost your agency a good chunk of the very thin margin of profit you can earn when you plan and buy media.
Media commission rates aren’t some random markup. It’s fair and reasonable compensation for all of the work your agency does to plan and properly buy a client’s media.
And after the buy, the agency has to reconcile every single spot or ad to make sure the client got what they paid for. It’s very labor intensive, and without the proper oversight — many agencies can lose their shirts by missing out on the commission.
Back in the good old days, it was simpler because there were fewer channels, but today, it’s a very sophisticated and complicated skill, and every agency should be properly paid for doing that work.
This is why it is critical that everyone in your agency understands how to calculate the commission properly using the correct rate.
When (since the very first ad was placed back in 1920) an agency says they get a 15% commission, what that means is 15% of the gross buy. To calculate that, you take the net cost of the media and multiply it by 17.65%. That grosses up the media 15%.
While it doesn’t sound like a lot, it adds up quickly.
Let’s say your agency places $1 million in media in a year. If you mistakenly multiply that $1 million by a rate of 15% (meaning you’re getting 15% of the NET, not the GROSS), your agency commission would be $150,000.
When you calculate it properly, multiplying the $1 million by a rate of 17.65% (now you’re getting 15% of the GROSS), your agency commission is $176,500.
That difference in commission rate probably means whether or not your agency can hire another entry-level media staffer to do all of that media verification.
And in many advertising agencies, it means the difference between whether the account is profitable or not.
Be sure that everyone inside your agency understands how to calculate media commissions properly so you’re not shorted the money your agency has earned.
And — attend our next Money Matters workshop to learn more about agency commissions, taxes, dashboards, best practice staffing metrics, getting your money out of your agency before you try to sell it, and much more.