advertising-agency-in-india

ADVERTISING AGENCY OF INDIA

ADVERTISING AGENCY IN INDIA

The First World War created conditions for the growth of some of the Indian

consumer industries. After the war, new British investment followed. The

need arose for specialized advertising services. The British India Corporation,

a British firm in Kanpur, with a relatively wide range of consumer goods, set

up Alliance Advertising Associates Limited. This was probably the first

advertising agency in India to provide a wide variety of services. In 1922, Mr.

L.A. Stronach, a senior artist of Alliance Advertising, left to start his own

agency in Bombay. Thus was born a new type of business enterprise in the

service sector in India.

The Indian advertising industry had a slow start and got its first boost during

the Second World War. With the British personnel having to join the armed

forces, opportunities opened up for Indians in this new talent-intensive

business. Then followed a brief interlude of uncertainty in the years

immediately following Independence. The launching of the First Five-Year

Plan and more so the Second Five Year Plan, with the accent on rapid

industrialization, gave an impetus to the growth of advertising agency

business in India. By 1952 there were 109 advertising agencies in India with

a total turnover of Rs 3.5 corer. By 1967, the number of advertising agencies

had increased to 279 with a total turnover of Rs 35 corer. The Indian

advertising industry has really come' into its own with the growing

liberalization of the economy since the mid-eighties. According to the fourth

agency report of the journal Advertising and Marketing, the Indian

advertising industry grew by 36.5 per cent in 1992 -93, far outpacing the

growth of Indian industry. What is significant, however, is that three of the

top four advertising agencies in India continue to be subsidiaries of

international advertising agencies-Hindustan Thompson Associates and

Lintas India being the first two, and Ogilvy & Mather being the fourth. What

is more with the new interest of many national corporations in the Indian

INSTITUTE OF MANAGEMENT SCIENCES, LUCKNOW 1


market, a large number of international advertising agencies have entered

the Indian advertising industry in collaboration with leading Indian

advertising agencies. This is the process of globalization of Indian advertising

agency business. This is opening up new opportunities for Indian advertising

to assume greater responsibility and serve everywhere in the world and

gather experience of global marketing and advertising.

Types of advertising agencies;

Following are major types of advertising agencies that are currently

serving the advertising industry

. Full Service Agencies

A full service ad agency is one that provides a range of marketing

services. A full services agency provides services that are directly related to

advertising such as copywriting, artwork, production of ads, media planning

etc. It also provides such services in respect of pricing, distribution,

packaging, product design etc

Modular agencies

A modular agency is a full service agency that sells its services on a

piece meal basis. Thus an advertiser may commission an agency’s creative

department to develop an ad campaign while obtaining other agency

services elsewhere. Or, an advertiser may hire an agencies media

department to plan and execute a program for advertising that another

agency has developed. Fees are charged for actual work undertaken.

In House agencies

Those companies, which prefer to have closer control over advertising,

have their own in-house agency. This type is owned completely by the



advertiser. It performs almost all functions that an outside advertising

agency would perform and that’s why some people refer to it as full-service

advertising department of the advertiser. However, the difference between

an in-house agency and an advertising department is that the in-house

agency can undertake to serve several other clients, if the owner so desires,

but an advertising department solely undertakes that work of its owner and

not of outside clients. Secondly an advertising department may not be

equipped the personnel and facilities, which an in-advertising schedule and

costs, but also offers convenience for its owner, because it is just available in

the same building as that of the head office of advertiser.

Such in-house agency also benefits the owner as it can bring revenue

through agency commission that are offered by the media and by way of

fees that are collected from outside parties for undertaking their advertising

work. Such revenue increases the funds and profits of the company. There is

another version of in-house agency whereby advertiser handles the total

agency functions by buying service unit to buy time, space and place the

ads. Such an In-house agency is an administrative center (under the

direction of an advertising director) that gathers and directs varying outside

for its operation use agency would posses. In-house agency not only provides

control over

Creative Boutiques

These are shop agencies that provides only creative functions and not

full-service. The specialized creative functions include copy writing, artwork

and production of ads, they charge a fee or percentage of full service

agencies, and as such most of them convert into a full service agency or

merge with other agencies to provide a wide range of services.

Mega agencies

A significant of 1980’s is the development of mega agency. Agencies

worldwide merge with each other serve their clients in much better way. It



was in 1986, Saachi & Saachi, a London based agency who started the

movement and at present it is the third largest agency network in the world.

The Specialists Agency

There are some agencies who undertake advertising work only in

certain areas. there are agencies that specialize only in financial services or

only in publicity or only in point-of-purchase material etc. for instance

Soubhagya advertising agency concentrate on specialized in financial

advertising.

The Benefits of Using an Advertising Agency

Added Expertise

Media Knowledge and Unbiased Advice

Easier Administration

Media Buying

Quality Control

Information

Fending off the media

And when things go wrong

Cost Saving

Time Saving



DISADVANTAGES OF USING THE ADVERTISING AGENCIES

A main disadvantage of using an advertising agency would be the

communication factor. If an agency does not communicate or relay it's

clients goals and creative wishes properly problems can occur within a

contract and lawyers may have to become involved. Depending on the

communicative skill of the agency, you may be prone to being blindfolded

during much of the processes of your campaign leading to a lot of guessing

and speculation.

Another disadvantage would be the media buying discounts you may not be

able to take full advantage of due to commission barriers within an agency,

however an agency may have better negotiating powers than your company

and save you more money in the long run anyways. There are far more

advantages to having the right advertising agency than not.

The functions of an advertising agency:

To accelerate economic growth and create public awareness

To provide a total, professional, experienced service which is very

personal in its nature

To take the advertiser's message and convert it into an effective and

memorable communication



The Working of Ad Agencies

To begin with, the agencies started as one-man agents who booked space in

the

Media. Even today, in our country, there are so many one-man agents who

book space in the media. Soon the space booking was handed over to the

contact-man, and creative wordsmiths adept at sloganising undertook the

actual construction of the ad. In the course of years, the ad agency became

service-oriented, and was able to offer every possible service including

marketing, market research (MR), and public relations (PR).

Ad agencies have evolved over a period of time. These days we have mostly

studio-based agencies, some industrial and specialized agencies, and hot-

shops who only plan creative campaign by engaging the services of

freelancers.

At Madison Avenue, most of these large agencies of the world fiercely

compete for new accounts, resulting in a shift of millions of dollars of billing

from one agency to another. Advertising Age is an official publication of the

American Association of Advertising Agencies (AAAA).

In India, advertising business is worth Rs. 8,000 corers. There were only 62

advertising agencies in 1958, which increased to 168 in 1978, more than 2.5

times the numbers in 1958. There are more than 500 ad agencies today. The

oldest and largest advertisement agency in India is Hindustan Thompson

Associates Ltd. The second largest advertisement agency is Lintas.

Mumbai is considered to be the Mecca of Indian advertising. These days

agencies are also being set up at Bangalore, Madras, Hyderabad,

Ahmedabad and Delhi. In India the ad agencies are sole proprietary concern,

partnership or private limited companies.



It is better to operate agencies on professional lines, rather than as a family.

It is good to install MBO (Management By Objectives). An agency must

necessarily plough back at least 75 % of its profits into business.

The advertising agencies are shifting from the creative mode to the

marketing mode. Today the onus is on the agency to supply the client with

data on his industry; the days of the clients briefing the industry are almost

over. The agencies are expected to maintain database. There is a leaning

towards software for optimizing media usage, and computerization of studio

functions.

In India, the legal structure of ad agencies is that of a small proprietary

concern or a big partnership. Sometimes, they are private limited

companies, either big or small. Indian advertising is a fragmented business.

There are over 733 agencies accredited to INS. The top 25 account for 50%

of all billings. In addition, there are many accredited agencies.

It is the top 25 agencies, most of which are headquartered in Mumbai, that

set the pace and define the shape of the industry. Agencies like HTA, Lintas,

Clarion and O & M have shaped the entire advertising industry in the

country. Many Indians firms are coming up, by importing Western ad

techniques.

Many agencies die a premature death. Most people do not appreciate that an

agency –like any other business - must be properly managed. It is simply not

enough just to have great idea. In recent years, there has been a healthy

trend towards sound management practices, especially financial planning

and control.

This is a highly paid profession. It is a conspicuous high wage island. People

operate on high profile. Their life-styles are opulent because of high expense



accounts 'of entertaining clients. They got their elitist brand due to this

reason. But high salaries and freedom are necessary to attract talents.

People working in an agency:

Accounts Executive: It is a key career option in advertising agency. He

is called an Account Director when he is a member of the Board. He is a link

between a client and his staff. The marketing or advertising department of

the client briefs him. He communicates this to the agency people.

He reaches out to different clients for seeking new business. Even clients

who want an agency' to work for them contact the accounts executive. This

business development work makes it virtually a marketing manager of the

agency.

Do right-brained people make better account directors?

The faculties of logic and reason are supposed to reside in the left-brained

people. While intuition and creativity are believed to be in the right. So far,

accounts director was considered suitable if logical and systematic, i.e., left-

brained. But if he has to motivate a team, he should be inspiring and

creative too, i.e., right-brained.

Copywriters: They are the wordsmiths who do the wording of an

advertisement. They are bright and talented. They have a flair for language.

They contribute to the theme of an advertisement. Creation of successful

copies for different clients establishes them in this field.

Visualisers: These are artists who put on paper what has been thought out

by the copywriter. They in fact design the ad.

Creative Director: He co-ordinates the copywriting and designing. He is a



senior professional who is seasoned in an existing advertising agency set-up

to take on this mantle.

Production Department: Persons of diverse talents like printing

technology, DTP, photography, typography etc. are involved here.

Media Planner: He has to allocate the advertising budget amongst media.

He has to select the appropriate media. He decides about the frequency, size

and position of an advertisement. He decides about its publication date. He

receives the tear-off copies from the media when the ad is published. He is

guided by the media research, which he undertakes, or by research

undertaken by an outside agency. Media is the most professionalized

department of advertising agencies.

Marketing Research: Modern agencies are integrated set-ups. They

provide a range of marketing services. Research data become very useful as

input to the creative process.

The Media : Most of the media today sustain on advertising revenue. They

sell space or time. While selling space or time, they have to convince the

client about the reach of their media vehicle, the composition break-up of

their readers and the pricing of their space/time selling. They monitor the

market, survey their readers, and highlight their readers' demographic and

geographic characteristics. They also maintain relationship with the media

department of advertising agencies who buy space/time on behalf of clients.

Ancillary Services : These are needed to produce/create advertisement. A

whole range of services like studio service, photographic service, printing

service, gift item producers etc. fall into this category.

Freelancers : These are professionals who work independently and have a



successful track record. They are copywriters, jingle singers, radio

announcers, artists, visualizers, technical writers etc.

Organization Structure of Advertising Department

All major advertisers maintain an advertising department. The structure of

the department however may vary from one organization to another, as

each one tries to develop a form, which is most suited to one's

requirements. The principal forms of organizational structure are based on

sub functions of advertising, such as copywriting or artworks

communication media

geographical spread

product and

End users.

Irrespective of the specific form, the advertising department has to perform

several functions. Principal among these are setting advertising goals, plans

and budget, selecting the outside ad agency, maintaining contacts, providing

support to the marketing staff and monitor the functioning of the ad agency.

Selecting the ad agency is one of the important tasks of the advertising

department. Several criteria, including experience, size, track record and the

quality of the personnel, are considered in the selection process.

As you know, there are different categories of advertisers. Depending upon

their functions, each organization develops its own structure, of which

advertising department is a part. What is important in this connection is to

analyze the functions an advertisement department is expected to perform.



Organization is a Manufacturing Unit

Manufacturing firms carries out bulk of advertising. It is therefore, necessary

to understand the various principles on which the advertising department

can be organized in manufacturing units. The basic principles are:

(a) By Sub-functions of Advertising :Advertising as a function can be

segmented into its various components, such as, Copywriting, Art Production

and Media. A specialist who in turn reports to the advertising manager can

handle each component.



Advertising Manager

Copywriting Manager Art Manager Production Manager Media Manager

(b) By Media

Advertising Manager

Newspaper Broadcasting Magazine TV Outdoor Direct mailing

© By Product

Advertising Manager

Product A Product B Product C Product D

(d) By Geography

Advertising Manager

Zonal Manager A ZM(B) ZM (C)

(e) By End User

Advertising Manager

Consumer Institutional Government

Market Manager Market Manager Market Manager



Reporting Structure:

The advertising manager has to report to somebody who is higher up in

the organizational

structure. To whom the advertising manager would depend upon how

much importance

advertising is given to the total operations of the firm. There are

several alternatives.

These are:

• Report to the Chief Executive (Chairman/MD.)

• Report to the Director (Marketing)

• Report to the divisional head if the firm is a multi-division firm

and responsibility is delegated at the division level.

Centralization or Decentralization

Should advertising be done on a centralized basis or should the

responsibility be delegated to lower levels - say product or

geographical divisions?

,

Centralized Advertising Activity has been defined as that which - is

located at or directed by headquarters, reporting to corporate sales or

marketing head or in top management. In operation it gets the

necessary product, market, and budget information from the divisions

and then controls the execution of the various programmes by:

1. Providing the needed information and guidance to the advertising

agency and other Services;

2. Then reviewing and approving the completed work before getting

division approval


ADVERTISING AGENCY OF INDIAA Decentralized Advertising Activity is operated and controlled by

individual units located in each major division, usually reporting to a

division head or to a division marketing or sales head. The division

advertising, sales and marketing people and control both the 'what'

and 'how' of the advertising job, getting only advice and counsel plus

miscellaneous services from a central advertising function.

In practice, however, it has been found that most companies follow the

centralized pattern of advertising organization. There are at least two

important reasons for it.

1. It is difficult to transfer the tasks of preparation and execution of

creative advertising from to the many without loss of efficiency to a

great extent.

2. Most companies entrust their advertising work to outside agencies

and it is more convenient with them in a centralized way.



Interface with other Departments

Advertising and, therefore the people, manning the advertising

department, do not function in a vacuum. Advertising is a tool of

marketing. It is done to achieve a specified short-term or long term

goal. The advertising staff, therefore, must actively interact with other

departments most importantly, marketing and sales. The interaction

has to be intensive to draw up a coordinated plan, of which

advertising is a part. In fact, not only the advertising department, but

also the outside advertising agency it may have employed, would have

to be actively associated with the formulation of the marketing plan.

In companies, which realize the importance of advertising in its proper

perspective, the advertising department gets useful inputs from sales,

product and brand managers; from Marketing heads, General

managers and top management and also from many others in the

engineering and manufacturing departments who provide valuable

advice in respect of appeals to be focused and also other advertising

matters.



Functions of the Advertising Department

Just as the organizational structure of an advertising department

varies, the activity profile also is subject to change from one

organization to another. Kleppner has identified14 activities, which

include all the major functions an advertising department in a

manufacturing organization is supposed to carry out. These are:

1. Determine in consultation with top management the advertising

goals, the advertising budget, and the advertising plan.

2. Help select the advertising agency.

3. Set up a plan of activity, allocating which work is to be done by the

agency and which by the advertiser. Establish with top management

the internal division of such non-commissionable duties as sales

promotion, research and public relations

4. Transmit the policy and problems of management to the agency;

keep it informed of changes in marketing strategies and other related

areas.

5. Decide upon the proportion of the appropriation to be assigned to

different tasks in the advertising programme depending upon the

importance of these tasks.

6. Approve the plans for advertisements by the agency and by others

who work on the advertising problems.

7. Prepare, purchase and issue sales material - point-of-purchase

displays and direct mail, including receipts, dealer advertising service,

premiums (unless company has separate premium departments).

8. Prepare, issue and control billing of corporate advertising.

9. Keep the sales force informed of forthcoming advertising.

10. Prepare portfolios of advertising for the salesman's use in showing

advertising to the trade and to other distributors.

11. Work with the sales department in preparing special programmes.



12. Prepare instruction manuals for those who will sell and use the

product; all in all, do everything possible to make the most effective

use of the advertising investment.

13. See that all mail enquiries are answered with mailings as required.

14. See that all bills are properly checked; keep an account of funds

and prepare proper reports for management.

The ad manager in charge of an advertising department has both

managerial and operational functions. He is responsible for interacting

with agencies and the media. He pays attention to outdoor aids. He

takes part in campaign planning and media planning. He frames an ad

budget, and allocates it. He is responsible for broadcast media. He gets

POP prepared. He is the man behind SP and merchandising. He

maintains press relations, and PR functions. He brings out a house-

journal. He is appointed on the basis of his knowledge of advertising

and journalism, his knowledge of the industry, his management

background, and his marketing background. He maintains a good client

agency relationship so essential for the success for the campaigns.



Advertising Agency's Role

Suppose you are a company with a product. It may be a totally

new product. As a company with a product or service to sell, designing

and making that item is only part of the battle. People are not going to

beat a path to your door. You have to seek a channel of

communication.

Ad agency need to consider, for example:

For whom is the product or service designed?

Who would use it?

Who is the "target group"?

What's special about the product? In what way is it distinct?

Unique? Different?

What's its "position" in relation to other similar products?

What do you want to convey to the public about your product?

How should your company contact the public?

What medium should it use? Radio? TV? Newspapers?

Magazines? Billboards? Bus/subway ads? Direct mail? etc.

How extensive a region should your company try to cover?

How often?

Communication and marketing decisions involve specialized

expertise. Many companies that design and produce products or offer

services lack these specific capabilities. This is where advertising

agencies fit in. Advertising agencies exist to help companies to

communicate with the public, Market the company's product.

INSTITUTE OF MANAGEMENT SCIENCES, LUCKNOW

Company with a product or service

Ad Agency Media Public

18


The process of advertising involves considerable specialized knowledge

and expertise

About people - Their interests, preferences, needs, wants,

lifestyles, expectations

About media - Their reach, their effectiveness, their specific

appeal

About the company and its product – And about competing

companies and their products

Services offered by ad agency ;--

Total Advertising Services :Strategic planning, creative

development and media services for advertising, particularly in

television, newspapers, magazines and radio; providing the best

creative designed to capture the imagination of consumers

Marketing Services: Provision of a number of advertising related

services, including sales promotion, market research, PR and event

marketing.

E-Solution Services : e-solution services, including system

integration services, e-business consulting and customer relationship

management (CRM), Search Engine Marketing (SEM) and Search

Engine Optimization (SEO) and e-promotions using the Internet and

mobile.

Content Business: Sales of sponsorship, broadcasting and other

rights, and the production and marketing of such media / content as



sporting events, films, TV programs, animated content, music and

other forms of entertainment.

Integrated Media Services : Bringing value to both clients and

media-related companies by offering a wide range of media solution

services

Sales Promotion : Providing comprehensive sales promotion planning

designed to complement mass media and other activities

Event Marketing : Assisting clients by providing dynamic vehicles for

their messages in the form of on-the-spot interactive communications

Integrated Branding Services : Assuring clients the highest quality

of branding services for their communication needs

TOP 10 ADVERTISMENT AGENCY OF INDIA

Adbur Pvt Ltd

Akshara Advertising

Mudra communication ltd

Chaitra Leo Burnett Pvt Ltd

Contract Advertising (India) Ltd

Crayons Advertising and Marketing Pvt Ltd

Creative Advertising

Enterprise Nexus Communications Pvt. Ltd

Euro RSCG Advertising Pvt Ltd

Everest Integrated Communications Limited



The source of an advertising agency’s income:

A manufacturer who operates out of a small and unpretentious office is

often impressed (sometimes unfavorably!) by the obviously furnishings

in the offices of some advertising agencies. Paying for part of the

agency’s overhead, rent, payroll, etc. is naturally going to use up some

of the money he spends for advertising. Should he spend his money

through an agency, or should he spend that money direct and thus

save the cost of the agency’s services?

Questions like these are good questions, but the answer to them is

often not as clear or simple as it seems. In order to answer them,

attention must be focused not on the total costs of advertising agency

service but on the additional costs, if any which the use of an

advertising agency will involve as against the expenditure of the same

number of advertising dollars on a direct basis without agency

participation in the expenditure. The difference is a vital one, because

of the nature of historically established advertising agency

compensation methods.

An advertising agency traditionally derives its basic income from

“agency commissions”. Those commissions, for the most part, are paid

to the advertising agency by various advertising media (e.g.,

newspapers, magazines, radio or televisions stations or networks, etc).

Agency commissions is usually established at or near the level of 15

per cent of the “card” or “list” price of the space, time or other facility

purchased.



To be sure you understand how the commission is derived, let’s use a

specific example is previously mentioned, a full-page four-colour

advertisement in LIFE cost $39,500. if you as an advertiser brought a

one-page four-colour single insertion in LIFE direct from the publisher

you would be billed the full published rate of $39,000. However, if you

had the ad prepared for you by an advertising agency which placed the

ad with the publisher of LIFE, the agency would be billed for the rate of

$39,000 less 15% agency commission. That commission of $5,925

would represent the agency’s gross income on the creation and

placement of that single ad. From your viewpoint as an advertiser, the

effect of this compensation method is clear. It would cost you no more

dollars out of your total advertising budget (or appropriation, as it is

called), for advertising space if you used an advertising agency that

would if you did not.

You may well ask: Why should advertising media pay my advertising

agency for services performed by the agency for me, the advertiser?

The answer is buried in the historical development of the advertising

agency, and would require more space here than its relevance to the

subject of this report warrants. What you should remember is that,

illogical or not, that is the basis of most advertising agency

compensation generally.

For a more complete picture of the compensation question, we might

note a few exceptions, which introduce added costs to the use of an

agency. Some advertising media (the large direct-mail house, for

example), do not grant advertising-agency commission. If your places

some of your advertising through non-commissionable media, the

invoice which you receive from your agency for such advertising is

likely to consist of two items, each identified. The first is the base cost

which represent the sum, which the agency paid out of its corporate



pocket to the media. The second is an additional figure, representing

agency commission. In that way the agency receives the same relative

gross income from the advertising it places, as it would have received

if the media granted commissions to agencies. It is customary also to

add agency commission to various other non-commissionable

expenditures made by the agency for its advertiser-client, such as the

cost of the engravings used in advertisements (purchased by the

agency from a photo-engraving house), and the cost of the finished

artwork from which those engravings were made.

Some advertisers tend to resist and resent the practice of agencies’

adding an agency commission to non-commissionable items. For

example, the agency may buy artwork, engravings or typographic

composition, or prepare a portfolio for the use of your salesman. Any

activity of that type costs the agency money, in terms of the time and

overhead associated with the activities of skilled and experienced

people in performing such specialized tasks. Agencies pass along the

costs involved by adding an agency commission to the cost incurred,

or by charging a special fee for the service. You should be alert to the

possibility that the fee or commission may be out of the line with the

agency’s costs. You should not, however, expect the agency to provide

such service – on which there is no commission from a media, nor any

other income for the agency to use to offset its costs – without charge.

Such charges are an established trade practice.

Not the vital importance of paying agency commission on all non-

commissionable media. If such expenditures were not commissionable,

the agency would often be in the position of having to choose between

two or more media, with significant difference in the agency’s own

income as one influence on the decision. Since all media expenditure

carry the same commission, whether it is the policy of the media to



pay an agency commission or not, the agency’s decision is influenced

only by its judgment as to what contributes the soundest media

approach to achieving the planned objectives sought by its client.

Agency commission represents gross income,

within which a profit-provision must be made:

It is important to remember that the agency commission, whether paid

to the agency by a media or whether added to the client’s invoice and

paid by the client in the case of non-commissionable media or non-

media advertising expenses, constitutes the gross income and not the

net income of the advertising agency. Out of that gross income, all of

the expenses of operating an agency is typically its payroll account. In

addition to salaries, which often represent as much as half of total

agency expenses, such other items as rent, heat, light, telephone and

telegraph, postage, and travel and entertainment costs must be paid.

There is, in addition, a further “cost” which should be recognized.

An advertising agency, like a manufacturing organization, is in

business to make a profit. An agency can realize a profit only if the

total of all its gross income. The management of an advertisement

agency typically plans for achievement of a planned-for profit margin

by the process of reserving a portion of anticipated income from a

given client (on account) for profit, and budgeting the remainder over

various expense items involved in serving the account. This tendency,

to take a “slice off the top” of total income from an account as profit,

differs from the profit-planning approach of some manufacturing

organization. It is rather general in advertising-agency management.



The amount and quality of advertising service

which you as an advertiser can expect from an

agency depends directly on the size of your

total expenditure ;-

Now to arrive at accurate perspective on what you as an advertiser can

expect, in the way of service, from an advertising agency you hire,

let’s mentally transpose ourselves to the agency’s side of the desk.

Assume that you are the president of an advertisement agency,

considering an account-present or perspective – in terms of how

important that account is to you or would be if you had it, and of how

much service you could afford to give the account if it wore “in the

shop”. What criteria do you use? A very simple one – a rough estimate

of the potential gross and net profit the account would provide.

Suppose that the account in question has a total appropriation, you

estimate, of $100,000. That represents gross income of $15,000. What

would it represent to you in real profit – that is, in net income? Assume

that your agency does its profit – that is, in net income? Assume that

your agency does its profit – planning in the expectation that it will

retain as profit after taxes, 2 per cent of its expenditure. In order to

have 2 per cent after taxes, however, you need about 4 per cent

before taxes. Note that is 4 per cent out of the total of 15 per cent you

receive as commission in other words a little more than on –quarter of

the total amount you receive as commissions you plan (or hope!) to



retain as before-tax profits in order to have about one-eighths of that

income as your after-tax profits. (There are two wide variations in the

earnings ratios of different types of advertising agencies and of

different sizes of advertising agencies. The 4 per cent before taxes –

per cent after taxes figures used are reasonable figures for any agency

in the moderate size range – that is, with total billings in an area from

5 million to 9 million, and with gross income at about 15 per cent of

total billings.).

The purpose of this relatively long example is to make an extremely

vital point. You as an advertiser approach an agency, and discuss with

the principals of that agency the possibility that they may be

appointed to handle your account, which you estimate will total

$100,000 a year. If you appoint them, you will be creating for yourself,

in effect, a “service bank account” in the amount of $11,000 a year.

(The $11,000 represents gross income of $15,000 reduced by profit

provision of a $4,000 before-tax sum.)

You are entitled to know just how much in the way of what kind of

service you will receive for that $11,000. the agency will (or should)

tell you. You should be on guard against being “over sold” – against

being promised $20,000 or $30,000 in service. You know from the

above figures that the only way an agency can deliver that much

service on an account your size, is for the agency to lose a substantial

sum of money in serving you.

As a minor exception to the above comment, we might note that some

agencies – perhaps most agencies – realize little or not profit in the

first year or two that they handle an account. There are substantial

non-recurring costs involved in acquainting the agency team with the

particular problems of the advertiser and his industry. Particularly on



an account, which is estimated to have substantial growth potential, a

deliberate policy of “investment spending” (i.e., spending in service

and in direct costs a sum in excess of commission income) is not

unusual. But mark this well: it is a very different thing for an agency to

have a planned policy of investing in new accounts in the first year or

two of serving them, and for an agency to promise continually to

provide more service than the commissions and/or fees involved can

pay for.

While commission income represents the major source of agency

compensation, there is an additional method of working out the

agency’s income from an account, which warrants mention. In some

cases, the cost of preparing a client’s advertising would be far in

excess of the commission income involved. Such a pattern is not usual

in the case of advertisers with multiple product-lines, using a variety of

different specialized business publications. Such publications reach

selective audiences. The circulation of each is far smaller than the

multimillion copy circulation of some consumer publications. The cost

of a page of space (and, therefore, the commission on a page of space)

is correspondingly small. On that type of operation, it is not unusual for

the advertiser and the agency to agree upon a service for handling the

account. Often commissions earned on advertising placed by the

agency are credited against and hence reduce the net fee the

advertiser must pay. The point to note here is that the advertising

agency, like the advertiser, is in business to make profit and is entitled

to do so when soundly managed. If the amount of expense involved in

handling a particular advertiser’s account (including time salaried

personnel, overhead items, etc.) is in excess of the commissions which

would be generated by the amount of advertising in question, the

agency is enlisted to and will typically insist upon a fee in addition to

commission sufficient to reimburse it for its costs and leave a profit for



the agency’s management.

Against the background of these general comments about the nature

of the advertising agency, it would be logical now to move into a

consideration of specific agency types and of factors involved in the

selection of an agency. Before you as an advertiser can discuss

intelligently with an advertising agency whether you are or are not

interested in their services or whether they are or should be interested

in handling your account, it is necessary for you to have in mind at

least an approximate dollar figure which represents a preliminary

estimate of the size of your advertising account.


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