How do media agencies earn money

The main role of a media agency is fairly straight forward. A brand wants to increase its sales and/or brand awareness, and therefore gets in touch with a media agency that will help the brand on two fronts, the brand message itself and/or the media exposure. In this article, we will focus on the media buying / exposure and how media agencies earn money. So let’s imagine a brand has a 200k€ budget, here is what happens in most cases :

  1. Client and agency negotiate a fee. That is opened and stated on the IO (Insertion order). It’s a percentage of the total media spend. Depending on the budget between 3 and 15%. For our example, let’s use 7.5%. Called agency fee. 
  2. Even if the agency still has 185k€ at its disposal for the media campaign, the agency will use a lower budget to negotiate with media owners (TV stations, radios, newspapers, billboard companies). Realistically 80% of the budget or 148k€ in our example. Called trading. 
  3. So already 52k€ of the client is gone. And it’s not finished. Media owners – let’s say TV station one, want to incentive agencies to spend the client’s budget with them and not another station. So they give kickbacks to agencies, calculated with brackets. For example – Called kickbacks:
    1. Total billing of the agency 1kk€ for a calendar year, 5% kick back on the media spent
    2. Total billing of the agency 2kk€ for a calendar year, 10% kick back on the media spent
    3. etc..
How Media agencies earn money
How Media agencies earn money

So if we take it all together : Agency fee (15k€) + Trading (37k€) + Kickbacks (14.8k€). Provided the agency is not asking for a fixed monthly creative retainer, on the 200k€ budget, 66.8k€ will vanish straight to the media agency.

So long story short, if you go with a media agency, you can expect 20-40% of your budget to end up in the pocket of the agency.

This sounds outrageous right ? I am a big fan of always internalizing media buying. No one will defend better your interested than an internal team.

However, out of fairness for the agency model, please see couple of elements why working with an agency can still make sense :

  • You need to go quick and wanna setup a cross channel campaign for 8 countries across 4 different marketing channels. And you are alone. In this case, use an agency for the quick execution. Meanwhile work on recruiting the right team
  • You have 0 knowledge in the market where you need to advertise. Then don’t hesitate using an agency for the start
  • You have a small budget and media owners will not even consider you. In that case agencies are your only option.

Good luck for your campaign.

 

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