What’s all this bull about agency billings? – A misleading measure of agency performance
February 2, 2012
Many people in the media still use media billings to indicate the size of the account or the size of the agency. Check out Mumbrella, or AdNews, B&T or even The Australian and The Financial Review. Even overseas, Advertising Age in the USA and Campaign in the UK use media billings.
Yet these media billing measures are irrelevant and misleading when discussing the size of accounts or the size of creative agencies. So why, when there are more relevant measures in the industry, are the media still obsessed by media billings?
Before the dismantling of media accreditation, advertising agencies provided media and creative services and were largely remunerated on a combination of media commission of 10% and a service fee of 7.5%.
Therefore when discussing agency remuneration or the value of a particular advertising account the media billings was an indication of not only the total turnover for the agency, but also the revenue based on the “standard” commission and fee.
Of course, even in those times, the advertising industry, like the movie industry, was prone to exaggerating budgets as a way of talking up the significance of a win. Or deflating the billings to deflate the significance of a loss.
Before the dismantling of the media accreditation system, there was a move away from the mark up for print and electronic production. Retail clients were the first to start remunerating their agencies on page rates for catalogues instead of the costs plus mark up.
In fact one prominent retail agency at the time generated more revenue from catalogue production than they did from media. When asked to provide their billings they would take their print revenue and multiply it by 5.7 times to project it as media billings and then add it to their actual media billings.
Therefore a media budget of $10 million and a print production budget of $2 million would multiply up to be $24 million in billings. Or what about a direct marketing client who spends $10 million on direct marketing and less than a million on media, and is declared to have media billings of $58 million?
Misleading the market and themselves
How many times have you read in the trade press where an account moves from one agency to the next and the incumbent declares a significantly smaller loss than the winner declares as their gain.
Or how many times do you read that an account is worth millions of dollars in media billings when the AdEx media spend for that brand is significantly less.
Now most advertisers would prefer that no-one knows the financial details of their activities. But this doesn’t stop the advertising agencies and the media obsessing about it, even though it rarely reflects reality. In fact some people have made a career doing little more than counting these billing wins and losses.
Retainer based on resources
Today most agencies, media included, are remunerated on resource or direct salary costs, multiplied by overhead and a profit margin rather than the budget or spend.
Perhaps a better measure of an account size is the number of resources of FTEs? (Full time equivalents). This is a direct measure of the costs and complexity of an account and their advertising. That’s why when negotiating an agency contract we spend so much time and effort getting the resources and associated costs right.
So if you are interested in knowing how big a particular agency is, don’t ask them about billings, as you never know what you will get. Instead ask about the number of employees. From this you can fairly accurately project their revenue and profitability.