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Leslie BursackBy Leslie Bursack

Insights Manager

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“Net” and “Gross” dollars are an archaic holdover from a compensation model that no longer exists, and the current differentiation between the two serves no purpose other than to create a source of confusion and inefficiency in the media supply chain.

The Media buying process is long and complex; there are several parties (agency and vendors) involved who must be diligent stewards of your investment. Technology, when used appropriately, has certainly helped to reduce the number of manual tasks. Media buying software automates a portion of the workflow, and the shift towards programmatic buying should condense the media supply chain.

Clearly the ad industry powers that be are working hard to keep pace with the rapidly changing technological landscape.  However, there are still a few business practices in place that honestly just don’t make sense anymore. One such practice is media vendors’ pricing of time (TV and Radio) and space (Print and Out-of-Home) in commissionable or “gross” dollars.  It is time to do away with net vs. gross dollars.

History of “Net” and “Gross”

Back in the early days of Madison Avenue (i.e. the 1920s) it became standard practice for media vendors to charge a “gross” rate and a “net” rate.  The “net” rate was 15% below the gross rate, and was honored only for qualifying advertising agencies.  Agencies received the 15% commission as compensation.  This practice held until the mid 1950s, when the Department of Justice concluded that it was illegal.  All buyers had to be offered the “net” rate; it could not be set aside only for agencies.

Still, for the most part, things persisted as they had for another several decades.  Most advertisers used agencies, and agreements called for agencies to charge the advertiser the “gross” rate and pay the media vendor the “net” rate, with the understanding that the difference was the agency’s compensation.below the gross rate, and was honored only for qualifying advertising agencies.  Agencies received the 15% commission as compensation.

By the latter part of the 20th century, however, competition and other factors had rendered 15% agency buying commissions obsolete. Similar to deal making over long martini lunches and account executives with private secretaries ala “Mad Men,” hefty 15% agency commissions are long-gone.  Commissions began to get considerably lower, and to vary based on a variety of factors including the inherent workload per dollar placed (local commissions tended to be higher than national) and the overall dollar volume of the client’s spend (with the assumption that there are economies of scale at higher spends).

As competition among agencies began to heat up, bargaining to earn and/or retain clients with reduced commissions, agency retainers and even fee based or project work became standard practice. Since each client-agency compensation deal is unique, agencies must translate media spending to the appropriate commission or lack thereof for each of their clients.

© Olgakhorkova | Dreamstime

© Olgakhorkova | Dreamstime

 

Simply No Longer Makes Sense

The fact of the matter is that most agencies aren’t even compensated on commission at all anymore.  They are paid flat fees for specific projects or time periods or are compensated based on a negotiated rate – typically attached to their labor costs, the value they create for the client, or other factors.  The few that do still charge fees as a percent of spend typically do not get anywhere near 15%.

This archaic practice hasn’t changed because it is ingrained in the industry’s business processes. The good news is there is precedent for doing away with outdated practices within the industry.

A few examples include:

  • Broadcast Networks used to charge an “integration” fee for each spot, which dated back to the time when they had to be manually inserted into the program.  It became part of their fee structure, and they kept it long after it was technologically irrelevant.  The networks finally moved away from it at the behest of advertisers and agencies in 2008.
  • Most magazines used to charge for “bleed” color ads (ads without a white frame, where the color “bleeds” off the sides of the page).  The reason for this was that the color bleeding off of the page raised ink prices.  As production processes changed, this practice became more questionable.  In 2009, the American Association of Advertising Agencies and the Association of National Advertisers challenged the publishing industry on this practice.  While some publishers still include a bleed premium on their rate cards, most have stopped listing it or will waive it as part of negotiations.

These practices may have made sense once, but hey, times change.  They were no doubt part of the sellers’ overall pricing model, but they weren’t transparent … they were fees associated with costs that no longer existed due to technological advances.  The industry adjusted the way it dealt with these dollars.  Maybe the vendors added them to the net working media rates.  Maybe they did a one-time write off on them.  Perhaps something in between.

Why It’s Time Now to Make This Move

You’re probably thinking, what’s the big deal?  I don’t pay more and my agency is used to dealing with it this way. While that is true, I still believe the industry should keep up with the times by conducting all business in dollars net of agency commission.  Having both sets of costs serves no one at this point.  It has become an antiquated remnant of the days of old.

Following are the primary reasons that it’s time to change:

  1. Plain and simple, it’s just not efficient. Dollars need to be converted back and forth between net vs. gross.  Some clients don’t get it, so it has to be explained to them, and client budgets have to be translated back and forth (to gross for the agency and its vendors, and then back to net for the client).  As media continue to “converge” things become more complicated.  Mobile video.  Programmatic TV and print.  It makes no sense to have inconsistent costs floating around.
  2. Treating all media types (TV, Radio, Print, Out-of-Home and Online) in the same fashion will eliminate confusion and reduce the incidence of reporting errors.  It’s interesting to note that online media sales are only conducted in net dollars.  Digital media will reach 30% market share globally in 2015, according to Magna Global, and is on track to surpass TV revenue in the U.S. by 2017.  It’s not surprising that online media vendors do not quote or charge rates with an agency commission included since these media came into being well past the usefulness or appropriateness of that practice.
  3. Cost benchmarking and competitive media spending data should follow suit for consistency’s sake. Currently, much 3rd party spend reporting is communicated in “gross” dollars. Why?  Because it’s been reported that way for decades.  Again, it just doesn’t make sense to include an agency commission (which cannot be accurately quantified based on spending) with this data.  Again, many advertisers ask their agencies and audit firms to convert all of this to “net” anyway.

I realize there are much bigger issues in need of a refresh in the ad world, but this seems like a relatively easy one to change that we can all agree on.  After all, it is one industry, with a limited number of players.  We are not talking about converting to the metric system, here.  Do you agree? Let me know what you think.

 

If you enjoyed this post, you might also like “Spot TV Advertisers:  Understanding Nielsen’s Measurement Updates”.

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