Topic 7 – The Business of Advertising Advertising is an enormous global business with expenditures in the billions. These expenditures in the areas of media placement, promotions and productions, are growing at approximately 6% a year. Although network television, the most costly and desirable placement presently, on the decline, new media options present alternatives that allow for great targeting of potential consumers. Advertising agencies have changed significantly over the last two decades and New York is no longer the only center for the industry. Excellent agencies are located other cities including Chicago, San Francisco, Portland, Minneapolis, and Seattle to name a few. The American Association of Advertising Agencies define an advertising agency as “an independent business, composed of creative and business people, who develop, prepare, and place advertising in advertising media for sellers seeking to find customers for their goods or services,” (p. 137, Kleppner’s). There are somewhere between 9,000 and 10,000 agencies nationwide. The Development of Advertising Agencies The Early Age (until 1917) Kleppner notes that the first Americans to act as advertising agents were the colonial postmasters who would accept copy for publication in papers. In the mid 1800’s, space salesmen and wholesalers began purchasing space3 and reselling smaller “squares” at their own retail rate. Each wholesaler had their own publications and their own rates, all of which were negotiable. However within twenty years, one of the early wholesalers set up a directory of publications that indicated his own estimation at their circulation and then offered advertisers space at a cost based on circulation. Of course, his estimation may or may not have been accurate and certainly would have favored his publications. By the 1870s, copywriting and other creative services were offered and in 1875 one of the first agencies was formed, N.W. Ayer. Ayer billed advertisers for what the agency paid for space and then added a fixed charge to the services instead of a commission. His clients agreed to place their advertising through him. To offer further incentive for clients to place advertising through their agencies, publishers agreed to pay commissions to agencies only if a full price was collected from their clients for placement, a policy that remained in existence for over 100 years. The commission was set at 15% as standard and is still in effect today. What that means is that the agency purchased space for the client at the publication’s cost and the client paid the full price to the agency but the agency was actually billed 85% of the total, and thus the 15% not billed to the agency served as payment for services rendered to the client. Also standard today is that the cost to product advertising (i.e., photography, film
production, music etc) is charged to the client at a fee of 17.65% of the net (which actually equals 15% of the gross). Types of Agencies A full service agency is “one that offers clients all the services necessary to handle the total advertising function – planning, creation, production, placement and evaluation,” (p. 142, Kleppner’s). A full service agency includes a number of advertising professionals to meet the promotional needs of clients as well as offering a global reach to those seeking it. An assembly of creative and technical personnel as well as marketing and research personnel help in the planning process. Administrative services are provided as well. The agency develops a plan revolving around the marketing problem by suggesting a strategy, a creative response, a media plan and a total plan. Usually the agency is divided into four sections: account services, marketing services, creative services, and management and finance. A creative boutique emphasizes the copy and art services to its clients. Other aspects of ad planning and placement are handled either by the advertiser or contracted out to other facilitators. A mega agency owns many agencies worldwide and can shift portions of accounts from one office to another without going through an agency review. When a client wants to consider a new or fresh agency, a mega agency can offer the services of different offices with a fresh creative pool to work with. Moreover, the size of the media placement that a mega agency buys allows for superior ability in negotiating with the media. The largest disadvantage is the conflicts between accounts from the different offices that are in the same product category. No client wants their product handled in an office that is also handling the advertising for a competitor. A media buying service, though not an agency, is an independent organization specializing in buying media time and space, especially on television and radio, and as a service to ad agencies and advertisers. This purchasing task has become more complex because of the numerous media options. An agency or advertiser will prepare the strategy and then hire a service to actually do the buying. Again, as with a mega agency, the service buys in large quantities and thus can usually obtain lower costs. Interactive agencies are a newer form of agency that prepare communications for new media such as the internet and interactive television. These new agencies have specialized talent and expertise that many traditional agencies do not. Some full-service agencies are opening special groups to handle new media needs (i.e., Ogilvy Direct). An in-house agency is an advertising department within a firm. Using its own personnel allows greater control over the product as well as saving on commissions that an outside agency might earn. However keeping everything in-house limits objectivity as well as
the experience of an outside agency. How an Agency Works The creative department comes up with the concepts that express to a target audience the value and benefits offered by their clients’ brands. The creative group develops the ad message. Generally the group is headed by a creative director who has subgroups headed by associate creative directors with writers and art directors and producers. The creative and production personnel breathe life into the ad message. The production department may be a separate department, allowing for the sharing of information among the staff producers. There is so much talent available for production that a producer often receives 5 to 10 demo reels a week. It is very helpful to be able to share information about directors and production houses and experiences with suppliers among the producers. However it is also helpful to be integrated within the creative department and sit with the writers and producers. This position allows the producer early access and input into project and a greater familiarity with the client. I have experienced both agency situations during my 15 years as an agency producer and both have their advantages and disadvantages. Ideally a producer will be involved with the initial creative approach as they are the moving image specialist on staff. The account services department has personnel with titles such as account executive, account supervisor or account manager and works with the client to prepare the advertising. Account service identifies the benefits of a product or service, the audience, the best positioning and then develops a complete advertising plan. Sometimes it also can do analysis and research regarding consumer behavior. These account personnel work with the client in preparing the ad message through the creative services in the agency as well as work with media services to develop media strategies. Account services keeps the various arms of the agency on time and within budget and is the liaison with the client. Marketing services in an agency are located within: sales promotion and event sponsorships, direct marketing and public relations. Most agencies have a small department and will hire freelance personnel as needed for special events. Certainly when a public relations response is required, an outside firm is generally called in to handle the event or crisis. PR is a very specific form of communication and requires specialists to direct the effort. Often a full service agency will have a one or two person research department that will hire special research facilities and facilitators as required. Research to be conducted is generally done through a research firm but directed through the agency research department. As a business, an agency will also have a staff of business managers who run the day to day business of the agency. This includes administrative services such as a personnel department to hire (and fire) staff as well as handle benefits packages, payroll department
and other business activities required (i.e., just ordering and paying the Xerox, telephone, electrical and supplies bills). Depending on the size and needs of an agency, there may also be a talent negotiator and talent payroll department. If the agency does a great deal of television and radio production, then a negotiator is required. However there are independent companies that will pay talent for not only session payments but also residuals as earned. This is a complicated process and requires a specialist to calculate earnings. When a number of agencies are employed to service an account, an agency of record will be appointed to issue all media orders and keep a record of all advertising placed (i.e., McDonald’s, Anheiser-Busch). The agency of record is paid a fee by the other agencies for executing a media buy however the other agencies still earn their 15% earned commission on media placement.. Agency Compensation As noted above, many agencies for many years used the 15% media discount as compensation for their services. But as media options proliferated, so did the costs to prepare advertising and 15% often does not cover costs. Today many agencies prefer to be paid by a fee based upon the services provided. Any out of pocket charges are covered by the client (with an agency markup of about .1765%) and then a fee for service is added. Some agencies agree to a performance fee in which the client will pay the agreed upon fee if the performance objectives are met, will pay a bonus if the performance is exceeded and will reduce the fee if the performance is not met. Performance is based upon research goals clearly specified in the advertising plan. There are some costs that an agency will absorb as necessary for conducting business with a client and these include travel costs to attend client meetings out of town as well as entertaining costs. Other communication organizations: a. Public Relations firms – handle the needs of organizations regarding relationships with the local community, industry associations, competitors, government organizations and stockholders. Tools used include press releases, feature stories, lobbying, spokespeople and newsletters. Goals include communicating information about the product/service/company to increase public awareness and goodwill b. Direct Marketing firms – maintain, sell and utilize large databases c. Sales Promotion firms – design and operate contests, sweepstakes, displays and couponing