The role of the advertising agency

There is little room for argument concerning the chief responsibility of advertising agencies. It is to carry forceful, truthful and convincing selling messages to the buying public. There are some 3,300 agencies in the United States and Canada. Less than 50 of these bill as much as $25 million a year. The top 100 agencies in the United States account for as much as 35 per cent of all the advertising placed through agencies. The majority of advertising agencies are small or, at best, medium-size businesses, rendering a variety of services to their clients.
An advertising agency sells time and talent to the nation's advertisers. Until recent years, most of the income of the agency came from the 15 per cent commission paid by the media (newspapers, magazines, radio and television). The practice grew out of the original role played by agencies: buying advertising space  (mostly in newspapers and magazines) at wholesale price, and retailing it to the advertisers.
In many instances now, the advertising agency has become an intimate partner in the marketing effort of the advertiser. In effect, the agency works for the client rather than for the media. The original relationship as space seller for the media has given way to marketing and sales service to the client.
Naturally, the cost of services has been re-examined. In many cases, as the services grew, the amount received in commissions from the media proved insufficient. Many companies, in an effort to be fair to their agencies, have agreed to special charges for services such as marketing research, publicity counsel, counsel with the preparation of financial statements, and many other services required by modern marketing.
The question of what are proper charges for special services is one that has been given increasing attention by both advertisers and agencies. Some manufacturers have attempted to do their own advertising, claim¬ing agency commissions from the media. Others have agreed to varying scales of compensation to the agency for different types of services rendered.
Recently, a new arrangement was announced, one being watched with great interest by agencies and advertisers alike. The company puts the agency on a retainer, much as a lawyer or other counsel would be retained. The agency continues to receive the 15 per cent commission from media, and if the income from such commissions exceeds the retainer at the end of the year, the balance is credited to the company. If, on the other hand, the commissions received do not add up to the agreed-upon retainer fee, the balance is paid by the company. Thus, both agency and client may, in the future, be on a more realistic pay-as-you-use basis than they have been in the past.
A large proportion of the advertising agency's operating costs represents salaries. Services represent, to a marked extent, human skill and effort. Approximately half of the advertising agency's income goes for com¬pensation to employees of the agency. The balance is overhead and profit, if any. Profits have tended to shrink in recent years as agency services and costs have increased. A more realistic relationship between agency and client is therefore imperative.
On the other hand, it is difficult to establish when and whether the client gets his money's worth from an agency. Dealing largely with services, the agency deals with intangibles. While the agency has, like any other business firm, fixed expenses (overhead, rent, light, payroll, heat, supplies, and the like), the clients' appropriations, as we have seen, often fluctuate with sales, reduc¬ing total billing and, hence, agency income.
The agency's total income is directly related to the total spent by the client, and extra services rendered by the agency must come out of its own total income from commissions, or from extra charges agreed to by the client.