15% Commission Versus Fee

David L. Smith, writing for the OnlineSPIN newsletter, argues for the application of the standard 15% commission structure to online media buys claiming that, without it, it is confusing and potentially loses money for an agency:

"I have seen several attempts at Web housekeeping systems of late where the agency percentage was added to the net cost, rather than computed on the gross equivalent. Why does this matter? 15% on $100,000 in net spending is $15,000. But if you take $100,000 net spending for any other medium, and try to make the commission 15% of gross spending, you must use a formula that is 100/85* net spending. As anyone who knows media math, this is the equivalent of multiplying the net spending by 1.1765%. This yields a total of $117,650 of which $17,650 is the agency commission, not $15,000. Try the math yourself. You will see that $17,650 is equal to 15% of $117,650. What does it matter? The difference of $2,650 or 15% could be the agency margin or the difference between the agency making a profit or not."

And this:

And you try to explain the above formula to a client who does not understand media math, and why you cannot just take 15% of the net spend. Or a client who thinks he has made a deal for 10% of the net that he has to pay 10% of the gross or 11.765% of the net."

Sheesh, who wants to deal with that on a daily basis and try to explain it to a client every time an invoice goes out?

My reply:

I can't believe we are even talking about commission anymore. For years, it's been fees. You bring up the confusion surrounding the gross up, net down math problem. Why would we ever want to bring that back?

As you point out, the time it takes to resolve this misunderstandings is a huge time suck. Net billing either pass through agency to client or better yet, direct to client (eliminating agency exposure), with a fee that is based on the work done is far simpler and far more relevant to the amount of work required to do the buy.

In fact, with a fee arrangement, an agency can get most its money even if the buy never happens because you fee bill for the planning/buy prep which is most of the work anyway.

And that "lost" $2,650 you refer to? Moot. It's all built into the fee and tied to overhead, profit, etc. Clean and simple.

Works wonders in this particular skittish environment where client's desire's are bigger then their wallet.

We should want KISS, not PITA (pain in the ass)

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