Commission Margin System

From Ad Age’s encyclopedia
Published September 15, 2003

When an advertising agency places an ad for a client, the medium (e.g., newspaper, TV, radio) pays a commission to the agency. If, for example, the commission rate is 15% and an advertisement costs $1,000, the advertiser pays $1,000 to the ad agency. The agency remits $850 to the medium and retains the remaining $150 as its commission. Thus, the commissions that an agency receives pay for the services it provides to the advertiser.

In addition to media commissions, ad agencies also usually mark up the cost of physically producing advertisements in a form acceptable to the media. If the media commission is 15%, for example, agencies will typically mark up production bills by a commission rate of 17.65%; that amount equals a return to the agency of 15% of the combined total of production expenses and agency commission. For example, if a production bill is $100 and the agency markup is 17.65%, the total paid by the advertiser is $117.65 and the agency commission ($17.65) is equal to 15% of $117.65.

In the jargon of the industry, media bills represent "gross" costs?that is, media rates including the agency commission. Production bills represent "net" costs, as they do not include commission and must be marked up (or "grossed up") to include the agency commission.

Around 1920, the rate for agency commissions granted by the media settled at 15%. The establishment of the level of commission at 15% reflected an accommodation between the media and agencies for the creative services the agencies provided to advertisers. The system was a subject of great controversy within the industry, pitting advertiser against agency, but ultimately it survived. The commission was allowed only to ad agencies. If advertisers bought space (or later time) directly from the media, they were charged at the gross or undiscounted rate.