Organizations choose an advertising agency based on the three Cs – Cost, Creative Ability and Compatibility. Creative Ability and Compatibility are subjective factors leaving cost as one of the more important determinants for choosing an agency. It is also important for an agency to get its pricing right as charging too high a cost ensures it loses potential clients to competitors while too low a price means the employees lose the motivation to work hard and the profit margin goes down significantly. releaseMyAd the premiere ad agency in Delhi had got the balance right as visible from its long list of clients. The main methods that an agency can use for costing purposes are:
- Retainer Basis: The agency is hired by the client for a considerable time period where it is given a minimum amount of money per month irrespective of the work that it’s performing. This method is often used as a tie up between large agencies and its major MNC clients which usually could send enough work in the direction of the ad agency to keep them occupied for months. However the retainer process is slowly losing popularity and relevance in the modern marketing world where paying a monthly retainer is often being viewed as a waste of money by many.
- Pay Per Performance Basis: This is a new pricing scheme mainly being used by the new digital marketing agencies which are concerned with social media marketing and search engine optimization. They are paid on basis of every click or every time the name of the client shows up in a relevant Google search query.
- Commission Basis: This is another pricing strategy that had lost relevance where clients gave a fixed percentage of media cost, 10%-15% to the agency looking after their media strategy as different companies look after the different mediums these days.
The other important pricing decision that agencies need to take is to decide on how to arrive at the hourly rate that they charge from clients. There are two main ways to arrive at this price which are:
- Rates based on Cost of Job Function – The more unconventional among the two options, where each service the agency offers has got its own rate depending on the agency’s proficiency with that service or its relative importance in the marketing mix. For example media planning and buying services might be billed at a higher rate than creating interesting design for the company website.
- Rates based on Cost of Agency Employees – This method is best demonstrated via an example. Let there be 10 employees working on the client’s project, their daily salary is calculated to be INR 1200. They work for eight hours a day so the minimum rate agency has to charge is 1200/8 = INR 150 from the client. But it has been observed that employees work productively for 75%-80% part of the day. So they work productively for 75% of 8 hrs = 6 hrs. Hence Agency’s hourly charge is 1200/6 = INR 200. The profit margin agency wants to keep is added to the hourly charge and the final rate is thus decided upon. So in this example if agency wants 50% profit, final hourly charge would be 200 + .5 * 200 = INR 300. Every employee’s hourly salary is thus calculated and then adjustments are made to charge the required hourly rate from the client.