Money is the root of all friction. Payment systems are, therefore, often the wreckers in relationships involving ad agencies, advertisers and media owners. Thanks to ad legend J. Walter Thompson, the open contract—15% commission on ad spends—was born as a standardized way to pay agencies. The 15% has since given way to many advertisers paying their agencies a set fee, which is separate for creative and media. Some advertisers still pay agencies a commission; some pay sliding commissions or lower commissions as media budgets increase. Some fork out commission, plus bonuses based on performance. There are a lot of flavours out there.
It’s the way agencies get to taste the flavour that’s now under scrutiny, with the Indian Broadcasting Foundation (IBF)—which represents broadcasters—saying it will be moving to a more transparent net rate system, instead of the gross rate system of payment. Currently, TV transactions happen on gross ad rates charged to advertisers. This includes the 15% commission. If the net rate system came into force, billing would be based on TV ad rates, minus the 15%, and commission would be paid directly by advertisers to agencies, say buyers.
Media observers say the net system is yet another way for broadcasters to get higher ad takings, and also addresses the age-old practice of ‘returns’. Today, ad agencies and media buyers get commissions or fees which are often much lower than the old 15%. “So, though media bills include the 15% in the gross rate system, the excess amount is often sent back by agencies to the advertiser. Some broadcasters have been questioning this return-back when their own ad rates are knocked down,” says a broadcaster who did not wish to be identified.
How will the net rate system actually benefit channels in this context? Well, media buyers fear that the difference between net and gross rates will finally be very little, since some channels don’t operate on rate cards. “Also, there’s no sanctity to the rate cards which exist, since different ad rates are negotiated for different clients or media specialists. So, is there really a set figure from which to minus 15% and make the rate net? Clearly, agencies’ ‘returns’ to advertisers are being eyed,” says a buyer who did not wish to be identified. Finally, should agencies return any part of their fees to their clients, and should anyone be concerned about this? Media and advertiser communities will have to solve these puzzlers together.
Marion Arathoon is Mint’s advertising editor. Your comments are welcome at firstname.lastname@example.org.