Gross ambiguity or net confusion: Understanding media commission rates

Commission fees are one of the two main methods used by advertisers to remunerate their media agencies (the other being retainer fees). Yet, despite their significance, commission rates can lack definition in client-agency contracts, leaving both parties vulnerable to misunderstanding and error. At Financial Progression, we believe that clarity in commission structures is fundamental to fostering transparency, optimising media budgets and ensuring fairness in client-agency relationships.

In this article, we’ll demystify commission rates, explore common challenges associated with them and explain how a thorough audit can help uncover value and build trust.

What are commission fees?

Simply put, commission fees are amounts charged by media agencies to their clients based on a percentage of the cost of media placements. The calculation of these fees can be calculated on either:

• Net media cost: The amount the agency actually pays for the media to the media vendor. For traditional media, it is normal to deduct a 15% ‘agency commission’ from the gross media cost to arrive at the net media cost. Hence if gross media cost = £100, then net media cost = £85.
• Gross media cost: The total value before the deduction of agency commission.

The basis for calculating commission fees — whether on net or gross media cost — should be explicitly defined in the contract between the advertiser and the agency. This clarity is crucial because it dictates how much the advertiser pays in commission fees and ensures that these charges are applied accurately and consistently.

The role of commission fees in media agreements

Commission fees exist to remunerate media agencies for their work in planning, buying and managing media campaigns. They can cover a variety of services, including negotiations with media vendors, campaign execution and performance monitoring.

That said, the application of commission rates isn’t always straightforward. Agreements may include specific stipulations for different types of media (e.g. TV vs. Display or Social) or purchasing models (e.g. traditional vs. programmatic). Misalignment between the contract and the commission rates (i.e. percentages) loaded into a media buying system will result in overcharges or undercharges, which highlights the need for detailed oversight.

Common issues with commission calculations

Our experience conducting audits for clients across more than 40 markets has revealed recurring challenges when it comes to the accurate application of commission rates. Some of the most common include:

Ambiguities in contractual language

Contracts may leave room for interpretation regarding whether commission rates should be applied to the net or gross cost of media. This can lead to discrepancies in the amounts billed. For example, if the contract doesn’t explicitly state the basis on which commission is charged, the agency might assume a more favourable interpretation (to them), which is likely to increase cost for the advertiser.

Complexity in media formats

Different media channels and buying methods, such as programmatic or inventory media, often come with varying fee structures. These complexities can result in inconsistent applications of commission rates, especially if the agency doesn’t clearly differentiate between media categories in its media buying system.

• Gross-up practices: In some cases, agencies apply a ’gross-up’ formula to net media cost to calculate commission fees. This involves inflating the net cost to simulate a gross cost, which can lead to inflated charges if the approach isn’t explicitly authorised by the contract.
• Errors in manual processes: Despite advances in technology, some agencies still rely on manual processes to calculate and report commission fees. This significantly increases the risk of error, through incorrect data entry or misinterpretation of contract terms.

A real-world example

In a recent audit, we uncovered a significant discrepancy in commission fees charged by a media agency for digital media placements. According to the contract, commissions were to be applied to the gross cost of media. For certain inventory media buys, however, the agency used a net cost (as a gross cost did not exist in its media buying system) and then applied a gross-up formula to calculate the fees.

… the agency used a net cost (as a gross cost did not exist in its media buying system) and then applied a gross-up formula to calculate the fees. This led to overcharges…

This approach led to overcharges exceeding £10,000. While the agency justified the practice by referencing general industry norms, it was clear that this did not align with the specific terms of the agreement. As a result, we flagged the overcharge as an adjustable item and recommended a refund to the client.

This example illustrates the importance of rigorous oversight in ensuring commission fees align with contractual terms.

The impact of inaccurate commission charges

Inaccurate or inconsistent commission charges can have far-reaching consequences, including:

• Financial loss: Overcharges, even if small, can accumulate significantly over time, eroding the advertiser’s budget and impacting ROI.
• Erosion of trust: Discrepancies in commission charges can strain the relationship between advertisers and agencies, leading to an erosion of trust and the need for difficult conversations.
• Missed optimisation opportunities: If advertisers base decisions on inaccurate cost data, they may fail to allocate their financial resources effectively or identify opportunities to optimise campaign performance.

Why regular audits are essential

Given the potential complexities and risks associated with commission fees, regular audits are an invaluable tool for advertisers. At Financial Progression, our audit process focuses on:

• Validating commission calculations: We ensure that fees align with the agreed-upon terms, whether based on the net or gross cost of media.
• Identifying errors and discrepancies: Through a detailed review of billing records and media booking reports, we flag any inconsistencies or erroneous charges.
• Strengthening contractual clarity: We provide recommendations to improve contract language, reducing the likelihood of future misunderstandings or disputes.

How to build a transparent agency relationship

Transparency is the cornerstone of a successful advertiser-agency relationship. To foster transparency, we recommend the following best practices:

• Define terms clearly in contracts: Ensure that your agreement specifies whether commissions are calculated on net or gross costs and includes definitions for all relevant media channels and purchasing models (e.g. programmatic or inventory media).
• Request regular reporting: Media agencies are data-rich organisations and are able to provide detailed breakdowns of commission fees and the basis of their calculation. Indeed, in some markets, it is common practice for the client and agency to formally reconcile commission fees immediately after the end of the calendar year.
• Invest in independent audits: An external review can provide an objective assessment of whether commission fees charged are accurate and compliant with the terms of your contract.

A proactive approach to commission management

Commission rates are not just a contractual obligation — they’re a reflection of the trust and accountability between advertisers and their media agencies. By taking a proactive approach to commission management, you can ensure that your campaigns deliver maximum value while fostering a positive working relationship with your agency.

Let’s work together

At Financial Progression, we specialise in uncovering hidden value through comprehensive contract compliance audits of media agencies. Whether you’re seeking to recover overcharges, refine your contracts or simply ensure compliance, we’re here to help. Contact us today to learn how our expertise can benefit your organisation.