Who will pay for advertising?
Selling ad pages is great, but nowadays part of the challenge is making sure payment for them is received.
In this time of economic unrest, everyone wants to be sure of [those] whom they are doing business with. Any change in the payment status quo brings with it suspicions of possible insolvency.
The advertising industry has recently endorsed a new position that hopes to clarify who is responsible for paying the bills, but the perceptions of the media and the agencies about the impact of this change differ.
At its February board meeting, the American Association of Advertising Agencies (A.A.A.A) decided to back a switch from sole liability to sequential liability for payment to the media.
Under this new policy, the agencies would no longer be responsible for paying a media company until they have received payment from the client. The status quo, sole liability, states that the agency is held responsible for payment of all insertion orders placed.
The A.A.A.A. defined their position by this statement: "The agency shall be solely liable for payment of all media invoices if the agency has been paid for those invoices by the advertiser. Prior to payment to the agency, the advertiser shall be solely liable."
"The reason for the change in position was the increasing concern on the part of the agencies about the number of clients going bankrupt and leaving the agencies holding the bag," said Burtch Drake, executive vice president and chief operating officer of the A.A.A.A.
The policy change has been under discussion for a number of years, Drake said, and this year its adoption was finally decided.
The current economic state was not the primary reason for the change, although Drake said it did "add another stone to the pile."
Although agencies will not be required to incorporate the concept of sequential liability into their contracts with media any more than they were required in the past to incorporate a posture of sole liability, most agencies traditionally adopt many of the association's guidelines.
What was really behind the move, Drake believes, were the changes the advertising industry has undergone since sole liability was put into practice in the 1930s. With agencies agreeing to be responsible for all media invoices, it cut down on the credit checks the media had to do and made business more efficient.
"Sole liability was beneficial to the media," Drake said. Sole liability had come about when agencies were space brokers receiving their commisions from the media. Changing practices have compensation to agencies coming in different forms, such as fees, from their clients.
Today, under sole liability, agencies are responsible for millions of dollars that they see only perhaps 10% of in the end. In recent years, a strong trend away from commission compensation has given way to fees. So in many cases, agencies are being compensated by clients on a fee basis alone.
However, the newspapers still offer a 15% commission built into their gross and net charges given to national advertisers.
"The stakes have gotten much bigger," Drake said. "The advertising business has gone beyond sole liability."
If one or more clients are slow to pay their media bills, or stiffs an agency altogether, it has a tremendous affect on the agency's solvency. This is because they are dealing with sums which are six times or more of their compensation.
"Under sole liability, agencies are at risk for 100% of the money, while they are receiving only 15% or less," Drake said. "That's not very good odds for the agency."
"It is a unique situation to this industry that the agency is responsible for that much money being placed," Drake said.
Essentially, the new position is for the benefit of the lawyers. The switch is not expected by the advertising industry to change business relationships between clients, agency and media. …