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Question
Hi Pete,

My name is Kimmie and I used to work for an advertising agency that billed clients based off commission multiplier.  This method includes the media buys and the agency commission.

For example, a clients that pays a 10% gross commission, the commission multiplier is .95.  From my perspective, it makes sense to say the standard commission is 15% and deducts it from the 10% gross client agrees which leaves a difference of 5%, I then deduct this from 100% and out comes .95.
Is there a multiplying way to do this shortly?

Another scenario is a client agrees to pay a 10% net commission.  The commission multiplier is .935.  I don't know how it comes out to .935.

Any input is appreciated.  Thank you!

Answer
Kimmie,

This commission thing is DEAD (for the most part). I don't know where you are living so comments may not be relevant. In the US, Canada and most of Western Europe the agency commission is 15%. The way that one would figure out billing for that sort of rate has a similar ratio as what you are seeing in the .935 multiplier that you indicate.

Take $100 and mark it up 7%. Most people would multiply the $100 X 7% = $107

BUT

This formula however is NOT representative of a 7% margin, and this is where many people miss the mark and leave a LOT of money on the table.

In order to achieve a 7% margin the formula for doing so follows:

$100 ÷ .93 = $107.53  

You will note that on $1000 that equates to $5.30, $10,000 = $530 and $100,000 = $5300 and so on.

When dealing with an agencies STANDARD markup of 15% or 17.65 one would see the formula work out like this:

$100 ÷ .85 = $117.65

Now you ask – what the heck, where did the 17.65 come from. See the 17.65 on the $117.65 sum from the above equation? That is the true margin of a 15% markup.

FYI… an ad in the New Yorker costs about $160,000. The sales rep is paid a 15% commission. If you were the rep would you prefer to be paid $24,000 for the sale of the ad or would you prefer $28,235?

An agency billing $10,000,000 would find a $264,705 difference.

I'm not certain why you ask your question(s) but I trust that this will shed some light, but interested to know better why you ask.

Pete

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Peter Gabany

Expertise

Strategic planning: Objective based communicaitons, ad creative graphic design, 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

Nearly 30 years in the business - 29 years operating an agency. Creative direction and agency management.

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RGD Ontario - www.rgdontario.com Possibly the best graphic design association anywhere. Leading the way in professional accreditation worldwide.

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Ryerson University - Photographic Arts CAAP - ICA CPPP - ICA

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Reggie Awards winner - Design Edge Canada SoGood Awards Winner - Social Good entries Design At Work Awards - many years.

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Our clients are successful in the business of manufacturing, chemical, nuclear, logistics, shipping (ships, trucks, rail, air), medical services (hospitals, ambulance and medical transfer, travel health, medical centres), tourism (fishing, destination, culinary, arts, more), not-for-profit.

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