How do local TV ad agencies do their pricing?

[Jonathan Grant]

I know there are several people here who work for or have owned an ad agency. I'm just curious what a typical price is and how they do their pricing. I know there are several different types.

For an agency that writes, produces, researches, and does the media buy for local businesses (not in NY/LA or anything of that size) what is the typical cost and profit margin? I'm assuming they do the media buy for cost, and keep the 15% difference from the agency discount they get. How much is typically charged for the producing, writing, researching, etc. of the commercial?

I'm trying to find out everything there is to know about pricing, deals, etc. so any info is appreciated! I just don't feel right about pretending to be a customer to find out how agencies around here to pricing.

[Bill Davis]

Originally Posted by Jonathan Grant

I know there are several people here who work for or have owned an ad agency. I'm just curious what a typical price is and how they do their pricing. I know there are several different types.

For an agency that writes, produces, researches, and does the media buy for local businesses (not in NY/LA or anything of that size) what is the typical cost and profit margin? I'm assuming they do the media buy for cost, and keep the 15% difference from the agency discount they get. How much is typically charged for the producing, writing, researching, etc. of the commercial?

I'm trying to find out everything there is to know about pricing, deals, etc. so any info is appreciated! I just don't feel right about pretending to be a customer to find out how agencies around here to pricing.

Well, you seem to have a grasp on at least some of the basics.

But as with many other things, I'm not sure there is any such thing as a "typical" price. And even if I could tell you that I once wrote a :30 TV ad for a top 15 market and billed $X for it, That ad, call it Ad Alpha might have been signed off on the 3rd revision. And my next Ad - Ad Beta might have taken six months and 30 revisions before the client was satisfied. And none of the 29 revisions in-between cost X - they were compensated for by incremental production billings over the development period plus the retainers received over that time, plus charges for a lot of other stuff that the team was working for concurrent with working on Ad Beta.

Also you need to understand that there are different kinds of advertising agencies with differing levels of specialization and expertise. For instance some are "one stop" larger shops that do everything from market research to media buying to production - all in house - others use a "creative botique" model where they're only responsibility for the createve production and leave the other disciplines to outside partners or shops.

It's also quite a bit dependent on what kind of product or service is being marketed. For example, a food product might require a lot of creative work on packaging, where a service business might require none of that but more point of sale print support.

Some integrated agencies are large enough to take care of everything from market research including focus group testing, trial marketing campaigns, product and display packaging, etc. etc. etc. Others specialize in radio, or TV or print campaigns. Today, of course, there are a whole host of advertising firms cropping up who concentrate on internet marketing and so-called "viral marketing."

In the traditional "full service" agency model, it would be typical for a client to pay the agency a monthly retainer to secure their services overall. Against that retainer there may or may not be a number of "billable hours" included. Campaign work over the retainer would be billed at market rates. And yes, one significant source of revenue for agencies who do media buying is the agency commission structure that discounts the media bills from clients to the agency so that the agency extracts a commission from the gross amount paid.

But that's just one revenue stream for a healthy agency. The whole point of an agency is that the client wishes to retain specific expertise in many areas of the marketing process that will be focused on building brand differentiation and brand value in the public consciousness. This could easily include anything from small yet critical details such as developing a "type standards" document that specifies the fonts and size relationships for packaging, customer communications, and even the letters sent to consumers in response to their communications - and also such large decisions as the nature and compatibility of using a particular celebrity personality as a brand spokesperson.

One thing advertising isn't is simple. It often LOOKS simple. But done well, great marketing and advertising is a coordinated dance as complex as any ballet - and like a ballet - to do it well - years and years of practice are typically required.

I will note that one thing that seems to remain consistent in advertising is that production and media and all other budget levels are typically based initially on product sales projections.

If you're doing advertising for any smart, sustainable business, they will have done those projections in advance and have set aside a percentage of expected sales for the marketing and advertising functions.

Agency charges will be a percentage of those budget projections. To so anything else would be a bit nuts - because if you're paying more for advertising and marketing than you have a realistic chance to recoup (and exceed!) over the product sales life cycle then you don't have a sustainable business model. And that's not good. At all.

Hope that helps.

[Jonathan Grant]

Thanks! I'm only interested in doing TV advertising, that's my expertise. I understand that pricing varies so much. But, what is the profit margin typically seen in the production of the actual ad?

[Bill Davis]

Johnathan,

You're not understanding the basic issue here. Which is that the costs of the various elements in advertising are virtually never set according to any form of strict cost or price standards.

Rather, they're priced based on the value of the production "ecosystem" that surrounds them. A :30 TV spot created by a young woman sitting at her Mac at home shot by her friend who's a wiz at digital video production, and placed by yet another friend who works in media buying for that local station is a VERY different beast from a :30 TV spot created by a full-service major regional agency who has a staff of 24 - where the 3 person research team spends 2 months preparing a market survey and media plan, three writers collaborate on the script, an art director maps out the graphics approach, an outside production crew is secured complete with all the gear and expertise needed to realize the fully tested storyboard.

The VALUE of the second approach is apparent in the value of the ecosystem that surrounds it. And the REASON that this is how advertising has evolved is that all the creative and production work sits as the foundation for a (typically) much larger expenditure of money to secure the broadcast of the work.

Spot Advertising is an inverted pyramid. The spot production costs are the small point. The Media Buy is the big base in the sky. The RISK is wasting the media buy. This is why literally hundreds of TV spots will be produced all over the world this month that will NEVER be broadcast. Because they failed in the final test of effectiveness and companies smartly decided not to risk wasting the media money.

By all means, if you want to produce TV ads go for it. However, unless and until you work in the industry for some time and learn how the inside of the business works, expect to work on relatively small accounts where the risk is commensurate with someone who is asking the kind of questions that you're asking here.

In truth, anyone coming from inside the industry - working at a small agency that does TV - would already know how to calculate the budget and worth of a production and wouldn't be asking here on DVI.

And someone without that knowledge trying to simply ask for a chart of numbers without clearly understanding the context behind those numbers is likely going to fail. Because you can't charge the proper rate for the kind of production ecosystem that someone else operates unless YOU ALSO operate that same kind of production ecosystem. And if you did, you'd know your answers already.

Kinda a Catch 22 problem, huh?

Market surveys such as you're undertaking are at best generalized to the point of near uselessness - and at worst destructive since they extract the key element that adds value to the whole proposition - the talent and experience of the people who populate the ecosystem.

That's not to say you can't or shouldn't keep going to become a TV spot producer. By all means follow your passion. It's just to say that the simple answer you seek CAN'T be as simple as you'd like it to be. And the reason is that the industry does NOT work the way you're currently thinking it should.

All you can do is get out there - propose numbers - have some accepted, have some rejected - and learn where YOUR market places the value for YOUR personal production ecosystem. Messy, but also fair, accurate and infallible.

Sorry.

[Adam Gold]

Jonathan, reading between the lines here, it sounds as if you want to produce TV ads, not actually form an agency. The production phase is but a small piece of the puzzle, as Bill so accurately points out.

As a small production house, you will in actuality work for an agency, and you're free to set your rates however you like, just as if you were shooting and editing anything else. You probably have some great ideas for ads and want to use this as a basis for being an actual agency, but as Bill notes it doesn't often work that way.

Sometimes those who have been creative directors for large agencies go out and form their own boutique agency where they come up with ideas. But even they rely on production houses to shoot and produce the ads, and on large media-buying agencies and research companies to fill in the rest of the equation. And oh yeah.... you gotta land the client first.

A marketing campaign is a *process*, not a thing you make. If you want to learn about the *process*, TiVo Season Two of "Mad Man," re-running now on AMC.

Feels like this thread should be in TCB.

[David Barnett]

It can vary on so many things, including market that your in, and size of client and budget. I get the feeling Jonathan isn't intending on doing car commercials for a large budget dealer, or a regional supermarket chain. Therefore, if it's as Bill stated a "young woman at home on her Mac" making it, well, yeah it's probably being done cheap. And for a local mom & pop hardware store or resturant doing a cable ad buy.

I work in the industry and have seen this done. I've seen quite a bit of it too, with spots being flagged for being 33 seconds to one which chose to use ACDC "Hells Bells" in the spot.

Alot of it comes down to the clients budget, similar to weddings. If they can only spend $1000 for your TV ad buy, I doubt they'd want $500 in production costs. But if they have $5,000 or $10,000 to spend, possibly over the entire year, then yes, you'd probably charge more than that (in addition to the media buying discount you'll rec'v). One thing to consider, is if the spot is not date sensitive (on sale this week only) you can continue to use the spot later on. So if they come back months later with another $1000, you can still use the old spot, and gain additional agency discount revenue. As I said earlier, it's difficult to price because it varies by area. TV spots for elite programming can cost $5,000+ in Chicago, or $500 in Poughipsie. I'd be willing to bet CNN or A&E locally can vary from $300 to $5 per :30, depending on the city/market and if you buy the entire city/region or a local zone.

Be sure to understand reach & frequency though when media buying. If they're selling cars buying one spot on American Idol or Lost won't work s well as it would for a cheaper product that's more common like a clothing sale or a buy one get one free pizza sale.