What is an Advertising Agency?

An advertising agency is an independent firm formed for the purpose of rendering

specialized services in advertising, such as preparing copy and layouts for
advertisement, getting blocks made for layouts and getting the advertisement out
through suitable media. In short, it is an independent agency engaged in the
preparation and placing of advertisement for and on behalf of the advertisers.
An advertising agency is composed of creative and business people – the writers and
artists, showmen and market analysts, merchandising and research people,
advertising specialists of all sorts.
An advertising agency may be a sole proprietorship concern or a partnership firm or
a joint stock company. But it is an expert body, having various departments, manned
by specialists, such as artists, copywriters and media experts, etc.
According to American Association of Advertising Agency an advertising agency is one –

i. Which is an independent organization.

ii. Which is composed of creative and business people.
iii. Who develop, prepare and place advertisements in media.
iv. Which is for sellers seeking to find customers for their goods and services.

Philip Kotler opines that “Advertising agency is a marketing service firm that assists its
clients in planning, preparing, implementing and evaluating various activities of
advertising campaign.”

Another view expressed by Rozer and Borton is that “Advertising agency is a group of persons
who have a specialization in advertising. It includes ad copywriters, ad designers, media
selectors and advisors for various advertising issues”.

From the above definitions, the common features can be identified as:
1. Advertising agency is an independent business organization.
2. Agency provides services to its clients who are searching customers for their goods and services.
3. Agency employs the experts, researchers etc.
4. Agency performs the functions like planning, implementation of campaign, research, follow up
advertisement, measuring effectiveness of various media for its clients.
5. It charges fees, service charges and commission from its clients.
Need or Importance of Advertising Agency

Even if a company has an efficient advertising department on its own, there are several reasons in favor of use of
these agencies. They are
1. A company cannot have all types of specialists such as copywriters artists, design staff, market research
experts, etc. But an advertising agency can afford to employ these highly-paid specialists on a permanent basis,
because their costs are spread over many advertisers. Hence, it is economical and cheaper to use the services of
an advertising agency.
2. An advertising agency can take an unbiased or objective view of any advertising problem. The agency can see the
product, its merits and demerits through the ‘eyes’ of the buyers. This objectivity is not possible for an advertising
department of the company.
3. The rich experience of an advertising agency, gained dealing with many products and clients could be fully
utilized by the advertisers.
4. A company’s own department may not have much time to produce results: an advertising agency can be put
under pressure for giving effective performance at shortest possible time.
5. If services offered by an advertising agency are poor or unsatisfactory, it can be easily terminated by the
company. However, an inefficient advertising department cannot be easily wound up in an organization.
6. Finally, the agency is paid by the media owner. The advertiser pays nothing for the use of an agency while
buying advertising space. He has to pay the same cost if he places an advertisement directly with the media owner,
Types of Advertising Agencies:
Since advertising agencies can range in size from one or two person operation to
large organisations with over 1,000 employees but the services offered and
functions performed will vary.
There can be following types of advertising agencies:
(a) Full service agency,
(b) In house agency,
(c) A creative Boutique,
(d) Media buying services,
(e) The La carte agency,
Full Service Agency:

Full service agency offers its clients a full range of marketing, communications and
promotion services including planning, creating the advertisement, performing
research and selecting media. A full service agency may also offer non advertising
services such as strategic market planning, design of sales promotions, sales training
and trade show materials, package design and public relations.

The full service agency performs a complete range of services for the advertiser In
addition to offering all research, creative and media services, the full service agency
often becomes involved in the advertiser’s marketing process. For example, an
agency may provide package design, sales promotion, dealer aids, sales meeting
assistance, product testing, sales forecasting, and advice on distribution and
marketing strategy.
Reasons for using a Full Service Advertising Agency:
A full service advertising agency provides the advertiser with a full package of
advertising services.
(a) Sales oriented creative work.
(b) Synergistic experience.
(c) Centralisation of responsibility and accountability.
(d) Greater objectivity.
(e) Simplified co-ordination and administration.
(f) Simplifies corrective changes.
(g) Professional strength in marketing area.
(h) Better working environment.
(i) May be less expensive in the long run.
(j) Stronger pool of talent.
(b) In-House Agency:

Even though most companies use full service advertising agencies, an organisation may decide to
establish its own operation for all services of an advertising agency within its own structure. The in-
house agency as its name implies is owned out right by and operated under the direct supervision of
the advertiser.
It perform all the creative and media services provided by the traditional full service agency. A major
goal in adopting this approach is to reduce the total cost of the advertising.

Merits:
1. It reduces the cost of advertising since the in-house agency is also entitled to the commission from
the media, which normally the out side agency would get & which the advertiser himself does not get.
2. It ensures tighter control over the agency operations both in terms of cost as well as creativity.
Demerits:
1. Top agency talents are less likely to be attracted into an in-house agency.
2. An in-house agency may be influenced by built in political forces that might turn bias while an
outside agency is more objective in its analysis and evaluation and is less biased.
A Creative Boutique:

It is an agency that provides only creative services. The client may seek outside
creative talent because it believes that an extra creative effort is required or because
its own employees do not have sufficient skill in this regard. Full service agency often
subcontract work to creative boutiques when they are very busy or want to avoid
adding full time employees to their payroll.

Creative boutiques are usually founded by members of the creative departments of

full service agencies who leave the firm and take with them clients who want to
retain their creative talent. These boutiques usually perform the creative function on
a free basis.
Media Buying Service:

There are independent companies specialize in the buying of media, particularly

radio and TV time. Media buying is a niche service and these agencies are
specialized in the analysis and purchase of advertising time & space.
Both agencies and clients utilize their services, usually developing their own media
strategies and using the buying service to execute them. Because media buying
services purchase such large amounts of time and space, they receive large
discounts and can save the small agency or client money or media purchases.
Media buying services are paid a fee or commission for their work.
The La Carte Agency:

Some advertisers prefer to order a la carte rather than using all of an agency’s
services. A la carte services can be purchased from a full service agency or from an
individual firm that specializes only in creative work, media, production, research,
or new product development. The two requirements most frequently obtained by a
la carte are creative and media services.
A boutique is typically a service agency used as a creative consultant, specialising in
concepts, strategy development, and execution. Some advertisers employ a boutique
to revitalize a tired advertising campaign or to provide services in specialised media
and product categories.
A media buying service works with an advertiser to provide a media plan, offer
counseling in the development of the advertiser’s plan, or provide specialised
knowledge of media and usage rates. Firms that prepare their own advertising
frequently find the complexities of media purchase require the services of a
professional.
Client Agency Relationship:
Even though much of the responsibility of maintaining a congenial liaison between the agency and the
advertiser falls on the accounts executive, there are certain ground rules pertaining to the efficient handling of
issues.
Advertising Agency Compensation:
All business need operating revenues to service. Advertising agency revenues come from two
sources:

1. Commission from advertising media.

2. Client fees.

The billing based compensation system, frequently labeled as the “commission system”, provides the
agency with money from the advertising medium. The commission is a percentage based on the medium’s
charge for the advertising space or time used by the advertiser.
With the cost based compensation system, often called the “fee system”, the agency receives fixed fees for
services given to the clients with media commissions offset against those fees. The typical agency today
receives about two third of its revenue from media commissions.

An advertising agency can be compensated in the following manner:

(a) Commission basis
(b) Cost basis or fee system.
a) Commission Basis:
The traditional method of compensating agencies is through a commission system. Commission is a percentage
based on the medium’s charge for the advertising space or time used by the advertiser. A agency receives a specified
commission usually 15% from the media on any advertising time or space it purchases for its clients. Some trade
publications allow as much as 20%.
There must be a clear understanding between the agency and the advertiser as to what services this commission
covers. It is quite common for the agencies to provide media planning and media buying and some related creative
work for the 15% commission that they charge and bill the advertiser separately for other services such as market
research, public relations etc.
For many years there has been a criticism of the commission system of payment of advertising agencies. For
example, why should an agency receive a 15% commission from the media rather than being paid by the client? For
example, the two agencies may require the some amount of effort to create and produce an advertisement.
However, one client may spend Rs, 2,00,000 in media which result Rs. 30,000 as the agency income while other
spends Rs. 20,00,000 generating Rs. 3,00,000 as commission. Critics argue that the commission system
encourages agencies to recommend high media expenditures to increase their commission level.
Other criticism is that there is no established rule for what services are included in the 15% commission.
Another criticism of this system is that it ties agency compensation to media costs. In periods of media cost
inflation, the agency is (according to client) disproportionately rewarded. This system is also being criticized for
encouraging agencies to ignore cost accounting system to justify the expenses attributable to work on a particular
account.
(b) Cost Based or Fee System:

The system is based upon the cost of performing the services which includes direct and indirect costs of
servicing the account plus a percentage mark up for profit.
Agency executives sometimes feel that the 15% commission yield an insufficient return to the agency in the
light of its many services to the client. This is true when the agency is working with small accounts. On the
other hand advertiser may argue that the commission rate going to the agency is too high.