Adopt a fee-based system or to stay with the conventional 15 per cent commission? This is a question advertising agencies have been asked with increasing frequency in recent years. The question has been debated, and the introspection is still on. It's not easy for established agencies, accustomed to a way of working to change the manner in which they earn their revenues. New agencies are more willing to experiment. Here's one that has done it, and seems to be succeeding.
Momentum, an advertising strategy and graphic design agency that was born on 22 August 1998, started with a fee-based system -- perhaps the first Indian agency to do so. It has already broken even, According to its directors, and is looking forward to rapid growth.
The agency was created by Jamshyd Vakeel and Priya Raj, both of whom worked earlier with R.K. Swamy BBDO. One day they decided to do it on their own, their own way.
"What possible connection is there between the 15 per cent commission system and the price and value of goods provided to the client? It may well be more, it may well be less, but it will always be irrelevant," comments Vakeel, Momentum's managing director.
Vakeel is echoing what many marketers have been asking of their agencies -- what's the actual value agencies provide? They're talking of accountability.
Both Vakeel and Raj feel that a fee-based system makes it easier for them to have dispassionate advice accepted by dispassionate clients, and helps them achieve accountable results. They believe that what the client wants isn't often what he actually needs. The fee-based system helps them prepare the best action plans for their clients. The fact that organisations like Alliance Capital, KPMG, Citibank Treasury, Procter & Gamble, and Sunday Observer have hired Momentum points to the power of that argument.
David Ogilvy was the pioneer of the fee system. He believed that when you advise a client to increase his advertising, he does not suspect your motive. When a client frets about the price of his agency's services, he ends up getting poor advertising at a low price. The fee system enables the agency to focus on innovative, cost-efficient and impactful ways to enhance brand equity, instead of just doing normal advertising in a traditional manner.
How does the fee system work? Traditionally, ad agencies in India have been getting a 15 per cent commission on the gross amounts received from media on media releases, and 17.65 per cent on the net amounts on all production (print, processing film, audio-visual). This system, many argue, is motivated by quantity (high media billings) rather than quality.
The fee system, on the other hand, works on a monthly retainer fee, based on the requirements of the brands and the clients. All jobs are paid for by the client on the basis of actual work done and billed according to a rate-card.
"Momentum returns all commissions received from media and other suppliers to the client," says Raj. "After the first three months, we ran into a heavy loss. But, gradually, we broke even later in the year. Our profits started increasing by August-September."
Adds Vakeel, "The fee system is fair in every way as every fee-account pays it's own way. Unprofitable accounts do not pull down profitable ones. This system helps keep all our clients happy."
Vakeel believes that soon other agencies will be forced to switch to the fee system. "For dinosaur agencies, disintegration and restructuring will happen faster than anyone suspects; they'll be forced to change to this new system."