One of the key concepts in business is making sure you know your total cost and what you're paying for. Have you ever wondered how much goes into an agency cost?
In this blog, we'll go over everything you need to know about agency cost and agency costs examples.
Agency costs, also known as agency fees or agency commission, is a pass-through cost incurred by a business which belongs to the category of indirect costs.
A business entity is considered to be an agency if it represents another party, who cannot do the transaction itself due to lack of time, information or expertise.
An agency cost consists of the remuneration of an agent and the costs incurred due to the agent's activity.
It is a cost incurred when a party, the principal, engages an agent to act on its behalf. The cost to the principal is typically measured by the agent's commission or fee.
Types Of Agency Costs:
Direct Agency Costs
Direct agency costs include the cost of staff and the rent and utility bills for the office.
A direct agency leasing an office will be responsible for paying a monthly rent and all utility bills for that office.
These costs don't vary too much from one type of agency to another, but the staff cost can vary drastically depending on what kind of work is being conducted.
Direct agency costs are the cost of an agency to do the work. They can be divided into two types:
- the cost of time per hour that they charge you
- the cost if they also provide equipment, like telephones or computers.
The direct costs of an agency typically include monthly retainer fees, commissions, and any other time-based charges.
Other factors that influence the cost of hiring an agency or consultant are the services they provide and their location.
Indirect Agency Costs
Indirect agency costs might include indirect labor, rent, overhead, and marketing expenses that are not directly related to the production of a specific good or service.
These costs can also encompass inventory holding costs. The more goods an organization keeps on hand, the higher the inventory holding cost will be.
Whether you’re a big B2B enterprise or small startup, indirect agency costs can quickly add up. And, because these hidden costs are rooted in human resources and technology, they’re often overlooked.
Company X typically has two types of agency costs. The direct costs are the costs associated with managing an agency, such as salaries and overhead.
Indirect agency costs are the reduction in company productivity when an employee leaves to work for an outside marketing agency.
Agency Costs Examples:
Now that we've gone over the foundation of agency costs and its types, let's take a look at some agency costs examples:
The need to keep a strategy secret can lead to agency costs. An agency may have been hired because of their ability to maintain confidentiality, but the client's goal might be to use them as a marketing tool.
In this case, the agency costs may include money spent on surveys and other research aimed at controlling the message.
Secrecy is the act of hiding something. This is one of the most common reasons that agencies charge clients for their services.
The agency may use secrecy as a way to build demand for their services, so they don't want it to be too easy to figure out what they'll do next.
In order to prevent leaks, agencies sometimes ask that writers sign a non-disclosure form.
This means that the writer cannot share anything they find out about the client or their project with any other people, including editors and other writers.
2) Unreasonable Incentives
The incentives and the agency costs affect one another. Agency Costs and Incentives can create a conflict of interest, and this conflict is why we need to monitor these two aspects closely.
Here are four examples of agency costs that are often unreasonable:
- Agency staff members have a commission on each sale they close, so they may provide misleading information to get the customer to purchase something they don't need.
- An agent or distributor may sell you an insurance package or investment product because it earns them a higher commission than other products without your knowledge.
- Agency staff members are paid by commission, so they will have an incentive to sell you a more expensive service plan or product even if it's not the best one for you.
- An agency charges a flat fee whether or not an item is actually sold.
3) Moral Threat
Employees who are not doing the work they were hired to do may be low in morale.
This is a moral threat that will cost an agency overtime premiums, productivity losses, and future lawsuits.
When employees low in morale are not doing their work, it can lead to lost revenue.
Therefore, when dealing with this issue it is important to take action .
If the employee is an excellent worker, it may be beneficial to move them to another department.
If the employee is not doing a good job, they can be fired.
If the employee is a low spot on an agency's performance chart it can be seen as a threat to other employees.
4) Office Politics
In the bigger agencies, you often have to deal with office politics. These can be a nightmare.
You can spend a lot of your time struggling with it and it doesn't help that many people in the company are against you.
If you're new, this can be a really tough thing to navigate. Some agency costs are more difficult to quantify.
Office politics, for example, can have a huge impact on an agency's reputation and budget. In many cases, employees who don't get along with each other will go out of the way to hurt the reputation of their co-workers.
This can lead to productivity being hampered by office conflicts, which in turn leads to a higher price per hour for the agency.
It is difficult for any company to fully understand all of their potential risks. One potential risk that many companies are not aware of is fraud.
Even if your company doesn't deal directly with customers, it is possible that employees could defraud the company.
Any organization that has people can be susceptible to fraud committed by current or former employees which can result in significant losses to the company.
Fraud is defined as the intentional deception or manipulation of data. The most common types of fraud cost agencies money and resources, and can put the lives of individuals at risk.
Even more concerning is that fraud can be perpetrated by both insiders and outsiders. In most cases, agencies will use an upfront fee for a project.
6) Multiple Principles
When an agency has more than one principle involved in the business, it can be difficult to determine who is in charge.
This means that if you're unhappy with the service, you may have to take issue with a person outside of the company rather than someone who is overseeing it.
When an agency reaches more than one principle, the costs increase per-firm. If you're looking for an agency with the same amount of experience, but not as many principles that will be less expensive, consider using a holding company or consolidating agencies to reach your goal.
Agency costs are an important factor of the total cost of a campaign. Understanding the difference in these costs can help advertisers plan budgets more effectively.
Hope this blog post has enhanced your insight about agency costs and its respective examples.
Running an agency?
Clientvenue is an all-in-one client portal and client requests management software.Learn more