How do I draft contracts to make a profit in Advertising for my Marketing Agency?

Tying your compensation to your performance can not only increase your revenue stream, but also your chances of closing new deals.

Instead of replacing your pricing model, you can keep your current monthly rate, but add one or more of the pricing models discussed below. This should not endanger the closing of a deal, since the performance-based portion of the price not only conveys confidence and honesty while limiting the client's financial exposure, but also makes the fixed (e.g. monthly rate) portion look like a good deal because it gets viewed as only a portion of the total cost.

Furthermore, doing so will encourage you to keep offering more value, since more value (not just more work) will translate to more revenue.

Over the years, I have dealt with many advertising agencies as well as providers of advertising tools. Some typical pricing models from my experience are listed below. Not all apply to every situation: some are good for e-commerce and other advertising campaigns that are directly tied to revenue, others are more suitable for advertising efforts less directly connected to revenue, e.g. publicity campaigns, some social media work, etc. I have tried to detail them here, but if you have any questions, I am happy to discuss them on a call, or in this thread.

GROSS PROFIT SHARE:
The agency takes a share of their gross profit, which means that it would pay attention to advertising products and services with higher margin, and allocate advertising funds accordingly. This can be tracked by asking the client to assign a gross profit margin to each product/service that the agency helps advertise; then the agency takes a set percentage of that profit. Essentially is like a revenue share agreement, but a variable commission, based on profitability of each product or service for the client, as follows:

Formula: Item revenue x item profit margin x agency's rate = agency income

For example, the agency shifts spending to campaigns for product A and those like it, because:
Product A: $1000 x 50% x 15% = $1000 x .5 x .15 = $75
Product B: $1000 x 10% x 15% = $1000 x .1 x .15 = $15

With larger accounts, it is possible to have a profit share that goes beyond just gross profit, but that is a dangerous territory for an agency, unless its relationship with the client is well established, since even more things that are out of the agency's control can reduce the amount of such profits.

REVENUE SHARE:
This works just as a profit share agreement does, but is much more common, and certainly easier to track. Since the agency only takes a percentage of the revenue that its advertising produces, regardless of what the profit margin is.

PAY PER ACTION/LEAD/ETC.:
The agency sets a price that it collects per conversion, which it should track using web, call and other analytic software. The further down the pipeline the conversion, the higher the agency can charge for it. For example the price of a regular website form lead, can be far higher if the provided phone number is answered when called back. Some advertising services make tracking this easier than others, e.g. Google AdWords Call Tracking https://support.google.com/adwords/answer/6100664?hl=en.

BONUS FOR MILESTONES:
It is possible for an agency to set arbitrary or rational milestones for receiving bonus payments, e.g. certain level of revenue generated for the client, or certain level of social media clout/followers/etc. achieved.

COST PERCENTAGE:
By far my least favourite, some large providers that offer tools to centralize advertising campaigns, as well as some advertising agencies, charge a percentage of the advertising expenditure (Ad Spend). From a client's perspective, the more they spend on advertising campaigns, the more they must pay the agency, regardless of the level of success achieved by those campaigns.

A retainer is often a great way guarantee income, what about it is not working for you?

If the client wants you to manage $500 in ads, you charge $50. $50 is your income.

I'd love to learn more and bring some clarity to this.

Feel free to reach out.
-Shaun

Hi, I am new to Clarity and like to answer this question although it is 8 months old. I had a similar challenge in my online marketing agency which I solved with technology.

I used Asana to manage each task on a customer account, even my meetings, phone calls was added as tasks. My team members had to account for all their time using assigned Asana tasks.
For timekeeping I used Harvest Time which integrates perfectly with Asana. Team members was able to manage all their time from within Asana with the Harvest timer button.

In Harvest Time I could track all time spend on each customer and if it reached it pre-set limit I would contact the customer to negotiate more budget or to move all new tasks over to next month.

This changed my business profitability big time, especially with Harvest Time project view.