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Ad-Agency Margins in Japan and North America/Europe

SOPHOLA deals with global marketing tech that has various strengths, but the one thing that we always go through trial and error when introducing them in Japan is “setting tool (technology) fees.” Currently, we are trying to figure out what kind of pricing models and fees are appropriate by referring to actual fee tables overseas and asking domestic ad agencies, sales agencies, and advertisers about this through some trials.

In the midst of this, I recently received a question from a business owner who asked me, “I pay 1 million yen per month for ad-spend and another 1 million yen per month for the ad-management fee, is that normal? (*figures are fictitious)”  I was quite surprised to learn that the the typical pricing model and fee management for the ad-management are not as well known as I thought. So today, I’d like to write about “Web ad management fees in Japan, Europe, and the U.S.” I hope this will be of some help to advertisers who use web advertising and to advertising agencies who work on their behalf.

The pricing model and market rate for Web advertising management fees is 20% of the advertising cost. If the monthly ad-spend is huge, the fee may be 10-15% of the ad-spend, or even less than 5% in many cases. I’ve been in the digital marketing industry for 10 years, and if anything, this has not changed since before that. However, there has been a major change in the past few years that will require a review of this custom.

This change is the spread of “automatic optimization” due to improvements in machine learning technology and data processing speed. For example, when I was at irep-a leading Japanese performance ad agency (2013-2015), we were still manually adjusting ad bids, allocating budgets, and changing keywords and ad creatives. Strategists (media buyers) with a wealth of knowledge and experience in ad management were doing daily ad management and customer reporting with a high level of expertise like craftsmen. At that time, if 20% of the ad-spend was the management fee, the monthly management fee would be 200,000 yen if the monthly advertising cost was 1 million yen, and 2 million yen if the monthly advertising cost was 10 million yen. (Of course, the larger the project, the more experienced the consultants and strategists were in charge.) However, the “automatic optimization (bidding)” function of Google Ads and the functions of other tools have automatically optimized about 80% of the daily work, and the question arises, “What is 20% of the ad-spend for? What are they doing for us every day?”

In order to respond to this, the following measures are often considered these days:
Advertisers: Build an in-house digital marketing team so that they can manage the ads on their own (called “in-house ad management” in the industry).
Advertising agencies: Provide more value-added services (business strategy planning, comprehensive web marketing support, etc., in addition to web advertising), and offering other pricing models. I feel that we are facing a time of great change in web advertising, just as the industrial revolution in the UK about 250 years ago changed the way people work.
*Please note that the above information is for pay-per-click web advertising, and does not cover performance-based advertising (affiliate advertising).

2. Europe and the United States
I wondered, “What are the pricing models and fees for Web advertising management fees in Europe and the United States?” So I did some research! Until a long time ago, the pricing model and fee for Web advertising management fees was 15% of the advertising cost (Ref: NEW YORK TIMES, THE MEDIA BUSINESS: ADVERTISING; New methods of agency payments drive a stake through the heart of the old 15% commission. ) Recently, in response to the aforementioned trend, the following three pricing models for Web advertising management fees are also in common use.
A. Time-based (man-hours)
This is a method of calculating costs based on the time (man-hours) required for daily operations, reporting, and proposal and implementation of measures. However, this has the disadvantage that it reduces the incentive to proceed efficiently and quickly.
B. Project-based
This is a method of calculating the cost by adding up the amount of each service required, considering the advertising operation as a project. In this case, if a service item that requires more time than expected occurs in the middle of the project, it may become a risk for the advertising agency.
C. Performance-based
This is a pricing model which seems to be currently becoming a mainstream, in which costs are calculated based on sales, profit, LTV, etc. on the measurement system. Since the advertiser’s KGI and KPI match with the priding model of ad management fees, it is considered to be ideal for many advertisers. Although I agree with it, I think there are aspects that are difficult to set because it is greatly affected by external factors such as market conditions and advertisers’ marketing activities.

Of course, an ad-spend-based pricing model does have its drawbacks too. For many advertisers, the marketing goal is not to increase advertising expenses, but to increase sales and profits with as little advertising expenses as possible, so there is a gap between the indicators that advertising agencies and advertisers value. Therefore, in order to respond to new changes, it will become more and more important in the future to properly discuss in advance what kind of pricing models and fees are appropriate for advertising management fees. This is also the case with SOPHOLA’s services, as we have some services based on advertising fees. Therefore, we will continue to discuss this with our vendors and try to come up with something that is more satisfactory to each customer!

Masaki “Mark” Iino
Founder & CEO
P.S. I went to see a cow with my family:)