Retainer fees: all boils down to consistency

Retainer fees: all boils down to consistency

I was reading how Anheuser-Busch InBev NV will no longer pay its main advertising agencies a retainer but will, instead, pay them a fee based on the scope of work agreed upon by both parties. That should translate into huge cost savings for the brewer and less comfort for its agencies. Closer home, I’ve been hearing how a few advertisers are renegotiating retainership terms with agencies although big media buyers say they have not noticed any such development.

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What’s indisputable is that, faced with a downturn, advertisers tend to redefine or tighten compensation structures. Still, a retainer fee is the equivalent of a safe haven for agencies, and about one-third of their clients, especially those with large ad budgets pay a fixed retainer fee.

“The retainer fee is meant to estimate the amount of time and costs that would be incurred by an agency in servicing a client," says Meenakshi Madhvani, managing partner and founder of media audit firm, Spatial Access Media Solutions Pvt. Ltd. The total cost plus profit margin the agency wants to make is then charged as monthly fees, she says.

A retainer fee, hence, protects the agency from the vagaries of billing. Even if the clients’ billings drop, the agency’s revenues are protected, she says. In contrast, remuneration systems such as commissions on media billings are directly proportional to a client’s ad expenditure.

Not many Indian advertisers are moving away from retainerships. “In the recent past, however, we have seen a number of clients renegotiating their contracted retainer fees. Many have asked for reductions and some have asked for more services at the same fee," says Madhvani, citing the example of how one of Spatial Access’ clients asked its agency to provide public relations, or PR, inputs within the existing fee structure.

Clients are also increasingly looking at combination fees—a fixed retainer and a performance-linked (variable) bonus that can be as much as the retainer. In her view, combination fees are the best because they help the agency secure costs, but deliver huge payments for outstanding performance.

They also help keep the agency motivated and accountable. And they ensure that the client is working on a set of quantifiable deliverables and hence, cannot avoid payment of performance bonus to its agency, if rightly earned, she says.

Performance is measured in terms of agency performance, brand performance and business performance, says Ravi Kiran, CEO-South Asia of media specialist Starcom MediaVest Group. Media agencies have lately been following a hybrid model of retainer plus commission that works to the advantage of the agency and the client, he says. “It protects the client against unforeseen variation in investment levels while giving the agency a minimum fee for fixed costs."

Usually, if the media billings are small but a lot of developmental or strategic inputs are required, clients work on a mixed model—retainer plus a fixed commission for buying or execution only, says OMD’s Sohrabji. She does not, however, believe that accountability necessarily increases with a fee system.

Clearly, both agencies and clients benefit from retainer-based systems. A client can delink its spending from the level of resources and time it wants the agency to invest; it can ask for extended services whatever be its budget since the client has delinked the service from the budget, says Sohrabji.

Also agencies can invest in talent and resources needed to service their clients with a clearer head when they have the assurance of retainer-based fees, especially since these are reviewed every year or other against prevailing costs. Says Kiran: “Retainer frees the agency from commission-led thinking and helps it recommend what would really work for the brand. It also helps the agency commit people to the account better, since the income is predictable."

Evolved clients usually prefer either a pure-fee model or a hybrid model with a robust fee component, he says, since it assures them regularity of service and team dedication. Clients who are less planned and disciplined in their budget projections or those who are still in the launch phase of their brands prefer commission or a hybrid model with a higher commission component as it protects them against eventualities, adds Kiran.

It’s all finally about consistency and continuity. Lynn D’Souza, chairman and CEO, Lintas Media Group, says most of her clients work on performance incentives over and above the retainer or commission amount based on a mutually agreed set of parameters and an annual appraisal. Project-based fees may work for creative agencies, she says. “But it cannot work for media agencies where there is a fixed delivery of services like tracking whether the brand is active or not."

Marion Arathoon is Mint’s advertising editor. Your comments are welcome at advalue@livemint.com