When done incorrectly, it can cost the agency a good chunk of the very thin margin of profit that they can earn when they plan and buy media.
Media commission isn’t some random mark-up. It’s fair and reasonable compensation for all of the work an 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 clients can lose their shirts.
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.
Which is why it is critical that everyone in your agency understands how to calculate the commission properly.
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 dollars in media in a year. If you mistakenly multiply that $1M by 15% (meaning you are getting 15% of the NET, not the GROSS) your agency commission would be $150,000.
When you calculate it properly, multiplying the $1M by 17.65% (now you’re getting 15% of the GROSS), your agency commission is $176,500.
That difference probably means the whether or not your agency can hire another entry level media staffer to do all of that media verification.
And in many agencies, it means the difference between the account being profitable or not. Be sure that everyone in your agency understands how commissions are properly calculated so you are ot shorted money you’ve earned.