Agency Commissions – Another Standard the Web Needs to Adopt.

We talk a lot about industry standards. Many of these issues remain as a function of the hubris of the early days on the Web. Many of those driving important Web media decisions had the attitude that, given that they were the greatest and were going to use the Web to change all media, why did they have to do things the way other media did?

The industry has come to the conclusion that standards are necessary and that Interactive media should follow traditional media mores wherever possible. Comparability is key. If you have an issue with this, don’t complain to me (although I will disagree with you). Talk to the standards bodies in the industry, the IAB, the ANA and the AAAA’s for starters. They have reacted to their constituents’ pleas to work to standardize the Web with other media.

So, why is it, in the face of this overwhelming desire for standards on the part of sites, agencies and advertisers, that the Web is the only major medium where the majority of the sellers do not grant standard 15% agency commission on buys? I really cannot answer this question, but I can speculate.

As the Web started up, much of the big money passed directly between sites and Web-oriented clients through “business development” deals. The agency was an afterthought on bigger deals. And the Global 3000 clients were not the major factor they have become today. So there was no need to follow what happened with other media who had to deal with the agencies and make room for their compensation. Of course, that has changed and the major sites – AOL, Yahoo and MSN – are going out of their way to court the major agencies. Why? Because that’s where the money is. Yet, many sites still have rate cards based on net with no agency commission. In fact, recently, a major search engine took away agency commission that it had previously been granting. (Yes, I realize that there are sites out there that grant agency commission. Thank you for that.)

This presents problems in many areas. Not the least of which are a) housekeeping systems (computerized financial tracking), b) discrepancies and misunderstandings after the schedule has run, c) lack of clear financial understanding between agency and client, and other issues.

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.

Any agency person involved in operations (e.g., the reconciliation of buys after the bills come in) can tell you that misunderstandings between buyer and seller on the net vs. the gross continue to plague deals after the fact. A buyer should not have to constantly ask for a definition of the basis for the cost. This does not happen in any other medium.

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.

It is all just too confusing for too many parties. Why did the Web do this in the first place? A) Because they could and B) because nobody cared until the billings swung to the major agencies.

It is not too late to fix this. If we can fix the impression definition, T’s and C’s and Reach and Frequency, we can certainly deal with something as mundane as this.

Ho hum you say. Don’t you have something more interesting to write about? Hey, this is not about the glory, it is about trying to make the Interactive medium profitable for agencies and getting the site paid in a reasonable time frame. You would think that faster payment alone would be incentive enough to make this change. But let’s face it. It is NOT a sexy issue. And will probably not get the attention it deserves. But all the same, we stand behind the need for the change. Any takers?

By David L. Smith
Courtesy of http://www.MediaPsot.com