Agencies’ fee-based business model hasn’t evolved in decades — and that may be a significant factor in the industry’s struggle to manage costs. With clients suppressing fees, asking for longer payment windows and seeking more project work, rather than long-term relationships, agencies may need to reimagine their business model.
Typically, an agency’s business model is one that is based on a client paying an agency a fee for its services. The fee is based on the number of full-time employees working on that business as well as the scope of the business that the agency handles. The scope of a piece of business will vary by client and by agency, but it will likely be based on the number of campaigns as well as the number of assets and deliverables for those campaigns. An agency will figure out the hourly fee to charge a client based on the number of full-time employees across its various disciplines needed to fulfill the scope of the assignment. That number will factor in the cost of the employee plus the agency’s profit margin.
That model is one that many agencies employ, regardless of whether they are handling creative, strategy, social, experiential, branding, customer experience, digital transformation, media, search, SEO or performance marketing. Roughly 60% of agencies surveyed by the 4A’s use that kind of labor-based fee model, according to a study conducted in 2014. That same study found that 16% of agencies used a mix between a commission model (where an agency is paid a commission off of the media it buys for a client) and other fee-based structures, said Matt Kasindorf, svp of agency management services for the 4A’s.
“The fee model has not really changed, and that’s the problem agencies face today,” said Jay Pattisall, a principal analyst at Forrester. “When you talk about the squeeze and the margin, what the client and the procurement organizations are doing is that they are pulling back on the fee such that what they are paying the agencies barely covers the cost of the agency employee.”
Why it squeezes agencies
Agencies using a fee-based structure with clients will often receive a retainer from clients for a specific set of services on a monthly basis. As clients have looked to cut costs in recent years, they have tried to rein in agency fees, push out payment to longer and longer windows (beyond 90- or 120-day payment windows) or switch to working with agencies on a project basis. This shift means that agencies, already dealing with thinner profit margins, can no longer expect a consistent revenue on a monthly basis.
“Due to years of overcharging, or the perception of overcharging, many brands have grown wary of retainer-based engagements with agencies and prefer to ‘shop around’ when it comes to selecting their creative partners,” wrote Rebecca Rosoff, co-founder of The Kimba Group, in an e-mail. “Project-based engagements make staffing a challenge. Retaining top talent was already a challenge for most agencies, but now, agencies have to provide services for a cross-section of disciplines since the media landscape is so fractured.”
“What the agencies are then faced with is inconsistency in revenue, very tight margins and long waiting periods before they are being paid,” said Pattisall. “They’re in a situation where they have to bankroll themselves and make the payday for several months before their bills are paid from their clients. Those compounding factors have created the economic issues that agencies are contending with.”
Generally, these issues are more complicated for legacy agencies that are working to adapt to a new model. “The newer agencies, having been created in the last decade or so, their business models are newer and more accustomed and attuned to project-basis arrangements,” said Pattisall. “They have grown up and grown able to adapt and work with a project-fee situation. They also tend to play in capabilities and categories that are more highly desirable and paid for, digital specialties, programmatic, search, performance, digital experience development. These are execution-style capabilities that clients are willing to pay for.”
The switch to project work versus a long-term relationship with a retainer fee-based structure will also change the way an agency works on a piece of business. “In the retainer world, you had people who were assigned to a particular piece of business 100% of the time, and they just continued to work and to rethink things until the end,” saidKasindorf. “In a project world, you’re paid for a certain deliverable. You have to figure out how to get that deliverable done in an efficient and effective way. Or you’re paid for a number of hours and if you aren’t keeping track of your hours, you will burn through your margin and potentially lose money on a project. It takes a lot more scrutiny to make sure you’re running that well.”
How we got here
Prior to the fee-based structure — which became much more popular following the creation of Omnicom in 1986 — agencies would generally take a 15% commission of a client’s media buy, and that would cover agency costs.
“If you sold an ad for $100, you would get the $100 from the client, and you would pay the media $85, and you would take that 15%,” said Kasindorf. “Correspondingly, there was a mark-up on production that would be equated to a 15% commission. The mark-up on production was 17.65%.”
Of course, at this time, agencies had creative and media capabilities under one roof. “That commission fee tended to be robust enough that it paid for a number of services to be applied to that,” said Pattisall. “In essence, creative and strategy were being thrown in for free because the real money maker was the media placement.”
As media and creative were split, the agency business model transformed from a commission-based model to a fee-based model.
“Agencies used to be part of one piece of [marketing,] but as the CMO role either goes away or transforms into CRO, CPO, CIO, agencies are learning how to speak different languages with these marketers as they learn to speak different languages,” said Kasindorf.
FAQs
What is the agency business model? ›
The agency business model entails creating a team of specialized experts who can solve clients' issues. Agencies do not sell products; instead, they provide services and charge a fee for them.
What is an example of an agency business model? ›For example, an agency business model may include charging a flat fee for a service and receiving a bonus based on your work performance. Or, it could consist of charging a flat fee for a set amount of hours each month and an hourly fee for the hours you spend beyond the agreed-upon amount.
What is a business model and why is it important? ›The term business model refers to a company's plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. Business models are important for both new and established businesses.
What are the 3 types of business models? ›Business models come in a variety of forms. Direct sales, franchise, freemium, and subscription models are among the common kinds.
What is an agency example? ›Examples of Agency
Choosing a career. Groups joining a social movement. Picking a spouse (also called affective individualism). Selecting a dessert off a menu.
Starting a modeling agency can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful modeling agency.
What is an example of an agency problem in business? ›If a CEO was worried that a potential takeover would result in being fired, the CEO might try to prevent the takeover, which would be an agency problem. However, if the CEO was compensated based on stock price performance, the CEO would be incentivized to complete the takeover.
What company is an example of the agency problem? ›The Enron Scandal
One particularly famous example of the agency problem is that of Enron. Enron's directors had a legal obligation to protect and promote investor interests but had few other incentives to do so.
Examples of Agency Problems
Real Estate Bubble and Goldman Sachs - When financial analysts invest against the interests of their clients, it's another agency problem. Goldman Sachs and other agencies created debt obligations and sold them short, with the thought that the mortgages would be foreclosed.
The most basic definition of a business model is that it defines how a company will create, deliver, and capture value. A business model is part of your overall business strategy.
What is a fee for service business model? ›
Fee-for-service (FFS) is a payment model where services are unbundled and paid for separately. In health care, it gives an incentive for physicians to provide more treatments because payment is dependent on the quantity of care, rather than quality of care.
What are the advantages of having a business model? ›Competitive Advantage
A significant advantage of a solid business model is that it can give you a competitive edge over other companies in your industry. Implementing a unique business model can give your company a unique reputation in the marketplace, creating buzz among consumers and encouraging first-time purchases.
Business-to-consumer (B2C) Business-to-business (B2B) Consumer-to-consumer (C2C) Consumer-to-business (C2B)
What are the key business models? ›- Retailer model. A retailer is the last link in the supply chain. ...
- Manufacturer model. A manufacturer converts raw materials into products. ...
- Fee-for-service model. ...
- Subscription model. ...
- Bundling model. ...
- Product-as-a-service model. ...
- Leasing model. ...
- Franchise model.
Agency's essential roles in commercial enterprise are twofold: first, to permit one person to attribute the legal significance of his or her acts to another, and second, to facilitate asset partitioning .
What is the difference between agency and business? ›An employment agency is one that provides staff who is then employed by the client employer. An employment business on the other hand, provides staffs who do not become employed by the hirer but who are seconded or supplied to a client employer.
Why is agency important? ›Agency is essential for being a leader. It is also essential for good emotional health and good relationships. If you have agency, you understand that you can manage your feelings and that what you say and do has an influence on the people and spaces around you.
How does model agency work? ›An agency specializes in finding gigs for models that are signed with them, while managers are there to guide their models and help them start, develop, and establish successful careers, present models to booking agents, and arrange placements for their models.
Which modeling agency has the most successful models? ›1. Elite Model Management. Elite is one of the most famous international modeling agencies and number eight on Forbes' Most Influential Modeling Agencies list. It's also praised by online fashion magazines, model communities, and reviewers.
How do models get paid in an agency? ›There are two ways to get paid as a model. The first is to work with a modeling agency, and the second is to become a freelance model. A modeling agency has connections through which they receive bookings from clients. The agency then assigns work to you and other models who meet the requirements.
What are the 3 agency problems? ›
The agency problem types are stockholders vs management, stockholders vs creditors, and stockholders vs other stakeholders.
What are the causes of agency problem? ›A common cause of this type of problem is when the interests of the principal and the agent do not align. For example, a manager might hire another assistant manager to lighten their own workload, but this might not be in the best interests of the shareholders, as it increases their costs.
How can we solve the agency problem? ›The main methods employed by firms and their shareholders to overcome the agency problem are performance driven share and bonus schemes. It is proposed that a performance measure such as Economic Value Added can and should be used to overcome the agency problem to benefit both shareholders and management.
What are some examples of agency cost problems? ›For example, the relationship between politicians (the agents), and the voters (the principals) can result in agency costs. If the politicians promise to take certain legislative actions while running for election and once elected, don't fulfill those promises, the voters experience agency costs.
What are the types of agency problem? ›- Management vs Owners. An organization appoints outside professionals who manage and run the company. ...
- Customer vs Owners. Yes. ...
- Senior vs Junior. In any organization, various people are employed who look after the company's overall management. ...
- Employees vs Owners. ...
- Creditors vs Owners.
Answer and Explanation: The answer is D) Corporation . The more removed the owner is from the manager, the higher the agency problems. Corporations are made up of an unlimited number of owners and must elect a board of directors to represent their interests.
Which of the following is the best example of an agency problem? ›The best example of an agency problem is: Lenders disagreeing with hotel owners about dividend payments.
What is an example scenario that explains the agency theory? ›A popular example is by offering incentives to agents such as corporate managers, to optimize their relationship with the principal. This exists where shareholders' short or long term returns determine the compensation of company executives.
Which one of the following actions is the best example of an agency problem? ›Which one of the following actions is the best example of an agency problem? Paying management bonuses based on the number of store locations opened during the year.
What is a business model formula? ›Your business model formula translates your business model into financials. So for example, we sell this product or service to these target customers. The reason our customers buy our product is this compelling benefit. We have an advantage over our competition because of this sustainable competitive advantage.
Which of the following describe a business model? ›
Which of the following best describes a business model? Typically a graphical depiction of the essential business process information.
What is a fees model? ›Fee Model means the structure of payment of fees or other payments from the tied tenant to the pub-owning business.
What is the problem with fee-for-service? ›Fee-for-service hurts patients and drives up costs.
Due to fee-for-service, some patients get too much care, some do not get enough, and others get the wrong care.
The model fee is the salary the client pays the model through the model agency for a job. The amount of payment depends on the experience and the prominence of the model.
Why is a business model better than a business plan? ›The business model is the foundation of a company, while the business plan is the structure. So, a business model is the main idea of the business together with the description of how it is working. The business plan goes into detail to show how this idea could work.
What are the advantages and disadvantages of using a model? ›The advantage of using a model is that it allows prediction and simplification of complex systems. On the other hand, the disadvantage of a model is that they could be misleading and can be misinterpreted in a different way.
Why is a unique business model important? ›First, it provides a company with relational and informational advantages in terms of its customers. It enables a supplier to better understand and meet its customers' needs.
What is the simplest business model? ›In its simplest form, a business model can be broken down into three parts: Everything it takes to make something: design, raw materials, manufacturing, labor, and so on. Everything it takes to sell that thing: marketing, distribution, delivering a service, and processing the sale.
What is the core strategy of a business model? ›Core strategy is the glue that holds your marketing together. It is a statement of your business' objectives and how you plan to achieve them. However, it is not an easy thing to write or develop, as it must be based on a lot of thinking and analysis.
What is the most important part of your business model? ›The executive summary is the first and one of the most critical parts of a business plan. This summary provides an overview of the business plan as a whole and highlights what the business plan will cover.
What are unique business models? ›
An innovative business model is a unique strategy that a company uses to streamline its operations. Some models focus on appealing to a target audience's distinct preferences, while others strive to reduce operational costs.
What are the two business models? ›standard and disruptive. Standard business models are those that have been in existence for a while and are proven to work. A disruptive business model seeks to change an existing business model in order to enter new markets.
How is an agency model structured? ›The traditional model
The organization is broken into different divisions -- creative, production, client services, or finance. Each division is led by a department head, such as an Advertising Manager or Director of Advertising, and includes all the team members who specialize in that field.
The five types of agents include: general agent, special agent, subagent, agency coupled with an interest, and servant (or employee).
What is an agency vs company examples? ›Companies often have many functional departments, including marketing, accounting, engineering, sales and finance. Agencies can be large in size but they are more specialized in one specific area. Therefore, they usually don't need as many management levels.
What is the most common form of agency structure? ›The Integrated Form of agency structure is the most common form of agency structure because it has various benefits. Integration is one of the most important aspects of the success of a business organisation. They are various departments in an organisation that works closely and are interdependent on each other.
How do you structure an agency team? ›There are three key client-billable roles in an agency. An account manager (who handles clients), a project manager (who oversees production), and subject matter experts (who create deliverables).
What is the structure of an agency in marketing? ›Whether large or small, advertising agencies typically have three main sections or divisions–account services, creative teams, and media specialists. These may be called by other names in different agencies, but their functions are generally the same.
What are 4 characteristics of agency? ›The main characteristics of an agency relationship are that it is fiduciary, it involves trust and confidence, agency laws govern it, and it is a consensual relationship. The agent is the party who is legally authorized to act on behalf of another party in business transactions.
What are the four functions of agency? ›Agency for Learning: Intention, Motivation, Self-Efficacy and Self-Regulation.
How many types of agency problems are there? ›
The three types of agency problems: stockholders vs. management, stockholders vs. bondholders, creditors, and other stakeholders like employees, customers, community groups, etc.
What is an example of agency issues? ›If a CEO was worried that a potential takeover would result in being fired, the CEO might try to prevent the takeover, which would be an agency problem. However, if the CEO was compensated based on stock price performance, the CEO would be incentivized to complete the takeover.
What is the difference between an agency and a business? ›An employment agency is one that provides staff who is then employed by the client employer. An employment business on the other hand, provides staffs who do not become employed by the hirer but who are seconded or supplied to a client employer.
What defines your agency? ›Agency is the sense of control that you feel in your life, your capacity to influence your own thoughts and behavior, and have faith in your ability to handle a wide range of tasks and situations. Your sense of agency helps you to be psychologically stable, yet flexible in the face of conflict or change.