Advertising Agency System

1841

| Volney Palmer opens first advertising agency

in Philadelphia. At first the agencies were just
brokers for ad space in newspapers

| Ever since marketing professionals have been

arguing, debating, and searching for the
answer to the question.

| “What makes a good

advertisement?”
1868

| With $250, Francis Wayland Ayer opens N.W.

Ayer & Son in Philadelphia and implements
the first commission system based on "open
contracts.“

| His clients include John Wanamaker

Department Stores, Singer Sewing Machines
and Pond's Beauty Cream.
Most enduring slogans in
advertising by N.W. Ayer

| "When it rains it pours", advertising salt for Morton Salt, coined

in 1912

| "I'd walk a mile for a Camel", advertising Camel cigarettes for

R.J. Reynolds Tobacco, coined in 1921.

| "A diamond is forever", advertising diamonds for De Beers,

coined in 1948

| "Reach out and touch someone", advertising long-distance

telephone service for AT&T, coined in 1979

| "Be all you can be", advertising military service for the United
States Army, coined in 1981
1877
• James Walter Thompson buys Carlton &
Smith from William J. Carlton, paying
$500 for the business and $800 for the
office furniture.
| He renames it after himself and
moves into general magazine
advertising.

• Later, he invents the position of account

executive.
1900

| Ad agencies/ ad agents proliferated in

1890s.
| 1900, there were 25 agencies in New
York.
Growth from the Role of
“Agent.”

| As responsibilities and services

expanded, the role of the agency
evolved from that of "agent."
| Agencies became the original
resources of marketing expertise.
Beginning of the
Persuasive, Hard-sell Era

| In 1900, Albert D. Lasker, turned copywriting

into a big business.

| From then on, the production of carefully

researched and constructed ad copy became
perhaps the central concern of advertisers.

| This was the beginning of the persuasive,

hard-sell era.
 After World War
I

| In the U.S., the total advertising expenditure in

1918 was almost $1.5billion.

| By 1919, it was almost $2.5 billion.

| By 1925, advertising expenditure had jumped

up over $3 billion.

| Advertising became almost as important as

industrial production itself.
Radio and Advertising

Mass radio happened in the 1920s.

| Advertising spending jumped from $4 million (1927) to $10 million (

1928)

z Radio advertising introduced human voice, emotions &

dramatic appeal

z Radio pushed advertising directly into the home

z Radio provided a medium where advertisers and ad
agencies actually controlled program content
1930 & 40s

| The U.S. Government attempted to regulate

advertising to an unprecedented degree, but failed.

| Congress introduced a bill in 1933.

| The bill was hotly contested and finally defeated in

1934.

| A milder law- the Federal Food, Drug and Cosmetic

Act was passed with the approval of both
advertising and industry.

| In the early 1940s, the U.S. Federal Trade

Commission came down hard on certain advertisers
for phony claims.
1950s

| Overproduction
| Rise of middle class,

| Effort was launched to mass-analyze the

American public
| Hundreds of social scientists moved into
the ad business.
| By 1955, McCann-Erickson had 5
psychologists on its staff.
1950s

| Dieting became a major national issue.

| Consumption of low-calorie soft drinks multiplied
| "Slim" became a significant social goal.
| In 1957, a congressional committee found that nearly all
of the dietary products were practically worthless.
| And cigarettes, in the 1950s, didn't escape; there was a
cancer scare.
1960s and 1970s
| The 1960's advertising transformed into a
modern with scientific approach.

| Creativity was allowed to shine, producing

unexpected messages that made
advertisements interesting to read.

| The Volkswagen ad campaign featuring such

headlines as "Think Small" and "Lemon"
ushered in the era of modern advertising.
1970s and1980s

| aw the emergence of the multinational

advertising agency/holding company, with
offices and affiliates all over the world.
familytree.pdf
| Today, advertising is evolving even further, with
"guerrilla" promotions that involve unusual approaches
such as staged encounters in public places, giveaways of
products such as cars that are covered with brand
messages, and interactive advertising where the viewer
can respond to become part of the advertising message.
What is an Advertising
Agency?

| Advertising agencies are full-service

businesses which can manage every
aspect of an advertising campaign.

| In general, an advertising agency

manages accounts, provides creative
services, and purchases media access
for clients.
 Advertising services

| Campaign planning
| Full copywriting and Illustration

| Creative advertising design

| Competitive space buying

Why to hire an agency?

| Provide a valuable resource for any

enterprise seeking to increase its
customer base or its sales.
| Bring together professionals with
expertise in a wide array of
communication fields
| Produce polished, quality ads that are
well beyond the capacities of the
client.
 Why to hire an agency?

| Agencies are generally

knowledgeable about business
strategy and media placement
| The media-buying experts develop a
strategic, targeted media plan for
their clients
| Overall, an advertising agency is
important for launching a successful
media campaign.
Advertising Agency Functions

| Professionals at advertising agencies and other

advertising organizations offer a number of functions.

| Normally advertising agencies are divided into four

departments: account services, media, research, and
creative.

| Creative Team –The principle role of account

managers is to manage the overall advertising
campaign
 TYPES OF AD AGENCIES
| Full –Service Agencies- Includes 4 major staff
functions: accounting deptt., creative services,
media planning and account planning (also
known as research.)

| Specialized Agencies- Either in specialized in

certain functions,audience or industries.

| Industry-Focused Agencies.
Contd………..

| Creative Boutiques- small ad agencies

that focus entirely on creative execution of
client marketing communication.

| Media-Buying Services- Specialize in

purchasing media for the client.

| Virtual Agencies- Operates as a group of

freelancers and is paid accordingly. they
don’t have their conventional offices.
 Account Services Department
(Account executive - Accounts manager)

| Account Management – Within an advertising

agency the account manager or account executive
is tasked with handling all major decisions related
to a specific client. These responsibilities include
locating and negotiating to acquire clients.
z Acts as liaison between art department, production
department, and client
z Represents client's needs to art and production
departments
z Provides interpretation support to client at
presentations
z Responsible for seeing that the client's needs are
met accurately and on time
 Account Services Department-Traffic
(Account coordinator/traffic manager)

| Coordinates all the jobs in

progress
| Works with all departments
throughout the advertising
campaign
 Media Services Department
(Assistant media planner, Media
director, Media manager)

| Applies statistical models to audience,

circulation, and cost figures to minimize
media cost and maximize media
effectiveness
| Manages the purchase and control of large
blocks of media time/space, whether in
print or broadcast
| Recommends and allocates this space among
clients according to campaign requirements
| Negotiates favorable billing terms for large,
repeat, and/or guaranteed space purchases,
which translates into more cost-
effectiveness for clients and agency
 Media Buying

| Careful placement of finished advertisements in

various media, with an eye toward maximizing the
potential audience.

| The research search conducted by the agency will

inform any media-buying decisions.
 Research Department

| Full-service advertising agencies

employ market researchers who
assess a client’s market situation,
including understanding
customers and competitors, and
also are used to test creative ideas.
| Expert in statistical applications,
mathematical modeling, project
design, and methodology
| Works with and often obtains
outside services
| Monitors project to ensure
accuracy and validity of findings,
which are then reported and
presented to the client
Creative Department- Art Direction
(Assistant art director - Senior art director)

| Requires knowledge of advertising

trends and strong visual communication
skills
| Develops and recommends artistic
strategy rendition for client campaign,
often presenting several for client
approval
| Generates creative content for both
print and broadcast
| Works with copywriter as a team to
brainstorm visual and verbal content
| Oversees progression of campaign from
rough sketches through final production
 Creative Department-Copywriting:
(Junior copywriter, Copy chief)

| Responsible for writing ad and promotional copy and

developing concepts for campaigns
| Often works with art director as a team to brainstorm
visual and verbal content
| Requires knowledge of advertising trends and a strong
writing ability
Creative Department-Production:
(Layout worker, Graphic artist,
Production manager)

| Artists and layout workers create the

visual impact of the ad by selecting
photographs, drawing illustrations,
choosing print size and type, and
sketching scenes for commercials to go
with the copy
| Design packages and create logos,
trademarks and symbols
| Production manager oversees the actual
printing of ads, filming of commercials, or
recording of radio spots
Internet Advertising Department

| Develops visual and written content for

client web pages, and/or on-line
advertisements
| Develops strategy for on-line promotions
and web page development
| monitors web site and on-line traffic
 Outdoor Advertising Department

| Develops content for outdoor/transit

advertisements in adherence to client's strategy
| Obtains sources for production and monitors
progress
Direct Response Advertising Department

| Develops content for direct response

advertisements, such as direct mail and
infomercials, in adherence to client's
strategy
| Obtains consumer information lists
from client and/or outside sources
| Monitors progress of direct response
efforts
SELECTION OF AD AGENCIES

| Range of service offered.

| Location of agency office.

| ‘Large’ vs ‘Small’ Agencies.

| The Agency Perspective

 Strategy
| S1 Planning techniques: Do they (the advertising agency) know
how to plan a campaign effectively? For example, do they
provide an effective time-line for developing a campaign?
| Do they consider alternative strategies? Do they have
contingency plans? Did they plan this meeting effectively? Much
evidence exists that formal planning techniques improve the
performance of an organization. Are they aware of this research
and of the recommended procedures? (9%)
| S2. Objectives: Do they focus on your primary objectives? Do
they know how to assess the effectiveness of advertising and
determine whether the advertising is meeting these objectives?
| Can they tell whether the advertising is providing a good return
on investment? What are the measurable outcomes? And what
level of success might be expected for each outcome? Will they
provide any guarantees on the success of the campaign? Is their
own compensation tied to your (the client’s) success? (11%)
| S3. Target market research: If it is necessary to obtain
additional information about the target market, do they know
how to design and evaluate studies so that they relate
effectively to the advertising campaign? Do they know how to
use survey research methods effectively? An examination of
one of their prior reports might be useful here. Are they aware
of the research in this area? (One way to assess this would be
to compare one of their target market research reports with the
research-based advice provided by Dillman [1978].) If they
subcontract their work, is the work well done? (9%)
| S4. Persuasion research findings: Are they familiar with the
extensive research findings on how to persuade people? If yes,
how do they ensure that this research is brought to bear on the
| advertising campaign? Do they have good grounds for violating
this research (e.g., research on the specific product may show
that it is an exception from the general principles)? (4%)
 Tactics
| Tl. Creativity techniques: What techniques and procedures do they
use to enhance creativity? For example, when they say they used
“brainstorming,” does this merely mean that a group of people sat
around and tossed out ideas, or does it mean that they actually
followed the highly structured brainstorming procedure? Although you
may not be able to judge the creativity level of a proposal, you should
be able to judge whether the procedures seem to be useful; therefore,
you should ask the agencies to explain their procedures. It is difficult to
predict whether just because a group came up with a creative idea for
the proposal, it also will come up with a creative advertising idea.
Worse yet, it is difficult to judge the creativity of a given idea. But there
is considerable evidence that structured creativity techniques are
superior to unstructured group processes (for a recent summary of this
tesearch, see Valacich, Dennis, and Connolly 1994). (16%)
| T2. Copy alternatives: What copy alternatives would they consider
and why? If they base this on the Big Idea, what alternative “big ideas”
were considered? And why was this Big Idea selected? (9%)
| T3. Copy testing: What procedures would they recommend to test and
select the most effective of their copy alternatives? For example, are
the procedures free of bias, replicable, and valid? (7%)
| T4. Media alternatives: What media alternatives would they consider
and why? (9%)
| T5. Media testing: How would they determine the optimal amount to
spend on an advertising campaign? What procedures would they
recommend to select the most effective media? Do they focus on the
objectives? For example, how would they calculate return on
investment by media? (Although difficult, a formal attempt is likely to
be more accurate than a guess. (7%)
| T6. Capabilities of the team: What are the capabilities of the people
who will be working on the proposed account? Do they have any
conflicts of interest? Do they have a complete list of clients served so
that failed, as well as successful, relationships might be examined?
(15%)T
| T7. Taste, legal, and ethical guidelines: What procedures does the
agency take to protect your company from offending interest groups –
from boycotts, legal action, or ethical consequences? For example, do
they have a formal review board that has legal expertise and
recognizes the interests of groups that might be affected? Do they
have a written code of ethics that they formally apply to each
campaign? (4%)
 COMPENSATION OF AD
AGENCIES
| Media commissions
| Markups

| Fees

Two main sources- Commission and Fees

| A commission is the amount an ad agency
charges the client as a percentage of the media
cost.
| Fee system can vary from company to company.
 Advertising Agency: Price Structure

| Advertising agencies charge their clients

for all the itemized expenses involved in
creating finished ads, including hiring
outside contractors to complete
necessary work.
| The client should receive invoices for all
such expenses.
| Agencies also charge for their services:
account management, creative services,
research, and media placement provided
by the agency.
Agency As Retainer

| When working with a new client an agency

may ask that the client put the agency on a
retainer.
| This retainer will consist of the full
advertising budget agreed upon, and will be
used to pay all production expenses and
media buying costs, as well as provide the
agency with its fee.
| The client should still insist on detailed and
accurate invoices for expenses taken from the
retainer.
Media Commissions.

| The Traditional 15% Commission.

For example, if an agency placed an advertisement in a newspaper with
a $10,000 media cost, the agency would bill the client $10,000, but only
pay the newspaper $8,500. Thus, the agency would keep $1,500, or a
15% commission, for the creation and placement of the advertisement.
This formula applies to all media. The 15% media commission is still
used on some accounts.

Adjustable Commission Rates. Today, however,

clients will negotiate, and agencies will adjust the commission rate to
match the client's budget so that the agency makes a fair profit and the
client is not overcharged. Often a sliding scale commission system is
used.

Criticisms of the Commission System.

Markups - Production &
Service.

| For example, to produce a magazine

advertisement, an agency usually buys
type, photography or illustrations, and other
production services from outside suppliers.
17.65% of Net = 15% of Gross.
Traditionally, the cost of these materials and
services are marked up 17.65% of the net
cost, which equals 15% of the gross cost
($10,000 x 15% = $1,500).
Fee Systems

| 1. Fixed Fee (Retainer)

| 2. Cost-Plus Fee

| 3. Performance Fee

| 4. Hybrid Fee & Commission

| 1. Fixed Fee (Retainer). Under a fixed-fee system, the agency and
client agree to a fixed amount of money to be paid for certain services over a
period of time - usually a fiscal year.
| 2. Cost-Plus Fee. With a cost-plus fee system, the client agrees to
compensate the agency for the costs incurred on each project, plus a fair profit
margin (usually in the 20% to 25% range). While this system is more complex
and requires rigid cost accounting procedures, it is probably the fairest system
of all. The agency must keep accurate records of employee time spent on each
account as well as expenses by project.
| 3. Performance Fee. In recent years, some agencies have built into
their compensation agreement a performance or incentive fee. If predetermined
goals, such as awareness level or sales or market share are met, the agency's
fee or commission amount is increased.
| 4. Hybrid Fee & Commission.
It is not uncommon for small-to-medium-sized advertisers to compensate their
agencies with a combination of media commissions and fee. In these instances,
the media billings may not produce enough commission to fully compensate the
agency for all its efforts. So, a fee is included to cover specific services.