AboutPeter Gabany Expertise Strategic planning:
Objective based advertising, Ad creative, Writing, Photography - buying and making, Illustration - buying, Print, Outdoor, Event, Media, Media Planning, Broadcast, How to select an agency, What the client must provide, Pitching a client / being pitched
Experience Over 25 years in the business - 22 years operating an agency. Creative direction and agency management.
Question What is the difference between gross and net advertising rates?
Answer Oh great a simple question! Thank you.
Media providers - magazine, newspaper, television, outdoor, radio, internet, etc will charge an ad agency their prescribed rate either as a gross or net amount.
Agencies have typically made their income based on a commission from the sale of the media.
This commission varies but typically it is calculated as a mark up 17.65% or 15% margin.
By the way people often confuse margin with markup. People believe if you mark things up 7% you have a 7% margin. Nothing could be further from the truth and a reason people get into financial trouble.
Take one hundred dollars and apply a 30% markup. You get $100 x 30% = $130.00 - correct? It is but the margin is calculated on the whole. If we take the $100 and divide by .70 we end up with $142.85 and in this a 30% margin. The $42.85 is 30% of the whole $142.85. If you gave up that $12.85 enough times on a million dollars of media sales you would lose $128,500. i only tell you this because of maybe what your second question might have been.
So, now to answer the first question. Media companies will charge gross or net. The net charge is without the commission where the gross charge is with the commission.
Newspapers and independent magazines typically charge net with the understanding that you will “gross up the charge” to your client. Large magazines and broadcast media groups will typically quote you a grossed up fee, expecting that you will pass that cost through to your client and once your client pays - you are expected to pay the net amount (less the margin) to the media company.
So from the model above a newspaper ad has a net cost of $100. They would bill you (agency) their customer, $100. You would then mark it up (gross it up) 17.65% and bill your client $117.65 giving you a 15% margin.
If you were a large magazine they would quote you $117.65 gross for an ad, you would bill this direct to your client and once paid you would remit $100 to the media company. Their (media company) bill to you would only show what you owed - the net amount. This would give you a 15% margin.
Want to try something? Take $100 and divide it on your calculator by 0.85 - what do you get? Shy a penny right? Well actually the correct formula to give you a true 15% margin has been rounded off.
If you are in a position to earn money this way or have a proper relationship with an agency expect a markup of 17.65% and a margin of 15%.
Please let me know if you understand this and if it was helpful and thank you for the simple question - I get some very difficult ones.
