Charlatans, con artists, and thieves make their way into every industry…and the creative sector is by no means immune from this group.
Ad agencies, public relations firms, and marketing companies are entrusted to represent their clients’ financial best interests when negotiating advertising pricing. Although these entities may be employing their best negotiation skills, clients do not necessarily enjoy the full benefit of the result. This is due to a widespread lucrative practice of pocketing money that exchanges hands underneath the radar.
Agencies typically bill in one of three ways:
- Monthly fee – a flat rate retainer for ongoing services which is governed by a strategic plan
- Hourly rate – a method for clients that require occasional services
- Project rate – a negotiated rate for a special project or short-term campaign
The monthly retainer arrangement is the most common method for companies that prefer to outsource their strategic communication needs. This method benefits both parties. The client company knows how much to budget and it can deduct the expenses from taxes. The agency is able to maximize employee productivity through long-term scheduling and has a reliable monthly source of income.
During the ad buying process, it is not unusual for agencies to negotiate discounts or rebates from media companies on top of lower prices.
Here’s how it works. The agency negotiates several months of radio or television commercial time. The media ad rep gives the agency a discount, typically 15-20 percent. The ad rep offers to provide two invoices: one that reflects the full price and another that reflects the discounted price. The agency passes on the full price invoice to its client for reimbursement and keeps the discounted invoice for accounting records.
In this scenario, rather than pass the discount on to the client, the agency quietly pockets the commission, which, for a multi-month contract, is a lucrative deal. Keep in mind, the agency bills the client a monthly retainer fee. Unless pocketing the discount goes against the terms of the agency’s contract with the client, pocketing the discount is perfectly legal.
Legal or not, this double-dipping is also perfectly immoral.
K2 Intelligence, a global corporate investigations firm headquartered in New York City, conducted a seven-month probe to look into agencies that are pocketing advertising discounts and rebates. According to the Wall Street Journal, the firm found widespread abuse of this unethical practice. This prompted J.P. Morgan Chase to launch an audit of its ad buyer. As some hidden deeds began to come to light, the agency’s work was suspended on Morgan’s $250 million ad-buying campaign.
A plethora of corporations are following J.P. Morgan’s lead as a result of K2 Intelligence’s findings. As a result, some companies are reviewing and renegotiating contracts to eliminate this practice.
Because of the sheer violation of trust in these situations, a number of contracts will not be renewed. And while K2 said that it was outside of its scope to determine whether laws were violated, it is a fair assumption that corporate counsel will be looking into that matter.
By reason of decency, an agency that receives a monthly retainer simply should not collect advertising discounts that could be passed on to the client. Doing so demonstrates poor character and amounts to a lack of gratitude for the privilege of being awarded the client’s business.
There is nothing wrong with an agency pocketing discounts if doing so is agreed to upfront and is documented in its contract with the client. In fact, some advertising agencies work purely on commission as their fee model.
So how does a business ensure the agency it selects does not engage in double dipping on costly long-term campaigns? Here are a few tips:
- While negotiating with an agency ask if they receive discounts from ad reps. If so, have a discussion of how that is factored into in the fees the agency will charge you. Will they pass 100 percent of the discount on to you? Will they work for a lower retainer fee in light of the volume of advertising you intend to buy?
- Asked to be introduced to the ad rep and to be cc’d on all email correspondences. Have negotiations take place at your facility in your presence. Although participating in these meetings will require some of your time, it will be worth doing so when engaging in a costly long-term campaign.
- Get it in writing. Be sure to confirm language about advertising discounts in your contract with the agency. Insist upon receiving original copies of all documentation from the ad rep.
- Ask your agency to work on a month-to-month arrangement. Assure your agent that you are in it for the long haul, but that you believe an agency should earn your business on merit, not through a long-term contract. Sylvia Marketing & Public Relations only offers month-to-month contracts. A job done well and done honestly will keep an agency retained for years. An agency that insists on a long-term contract probably has a good reason for doing so — a reason that is probably not in your best interest.
Advertising agencies, public relations firms, and marketing companies sit in a very crowded field. The field has an abundance of characters wearing funny eyeglasses and putting on dramatic acts to win business. There are also plenty of honest people in the industry who will put your best interests before their own. Knowing the right questions to ask will help you sort out the good from the bad, and get you the best bang for your advertising buck.