Question 1

An advertising agency works with its clients under a traditional commission system compensation arrangement.The agency places a 30-second spot for one of its clients on an episode of Friends,which costs $500,000.A reasonable estimate of the agency's commission on this space buy is:

Accepted Answer

Under a traditional commission system, advertising agencies typically earn a 15% commission on media buys. Therefore, 15% of $500,000 is $75,000.

Question 2

Which of the following statements about changes in the way advertising agencies are being compensated is true?

Accepted Answer

Many clients do not pay full commissions to their agencies due to the popularity of fee or incentive-based compensation systems, as they are seen as more equitable than the traditional commission system.

Question 3

Creative boutiques are agencies that:

Accepted Answer

Creative boutiques focus solely on the creative planning and execution of campaigns, often with a specific expertise or niche. They do not typically offer media buying or full-service capabilities like traditional agencies.

Question 4

Which of the following statements about creative boutiques is true?

Accepted Answer

Creative boutiques today are having trouble because clients often want a range of services. While creative boutiques specialize in creativity and innovative ideas, clients often expect them to handle a range of services which put them at a disadvantage when they compete with full-service advertising agencies.

Question 5

Which of the following statements is true about creative boutiques?

Accepted Answer

Creative boutiques are smaller agencies that focus mainly on the creative aspect of advertising. They do not have full-service capabilities like media buying or account planning, but they are known for providing quicker and more nimble services due to their smaller size and less bureaucratic structure.

Question 6

If an advertiser wants a very detailed accounting of how its advertising and promotional monies are being spent and what it is being charged by its ad agency,it is likely to use a(n)_____ compensation system.

Accepted Answer

A cost-plus compensation system provides a detailed accounting of how advertising and promotional monies are spent, as it involves paying the agency for its costs plus an agreed-upon profit margin.

Question 7

Critics argue the use of _____ can encourage agencies to ignore cost accounting systems and avoid media such as direct mail and sales promotions.

Accepted Answer

The commission system is often criticized for incentivizing agencies to focus on the sales volume rather than the cost-effectiveness of their marketing strategies. This can lead to agencies ignoring cost accounting systems and preferring media that offer higher commissions, such as TV advertising, over more targeted tactics like direct mail or sales promotions.

Question 8

Clients and creative boutiques that have developed their own media strategies may employ _____ to execute them.

Accepted Answer

Media specialist companies are often employed by clients and creative boutiques to execute media strategies because they have the expertise and resources to effectively manage and implement media plans.

Question 9

Opponents of the agency commission system argue this system is not effective because:

Accepted Answer

The agency commission system is based on a percentage of the client's advertising expenditures, which means that the agency receives a higher commission the more the client spends on advertising. This can create a situation where the agency is incentivized to spend more time on high-paying accounts and less time on lower-paying accounts, which can lead to a misalignment of incentives between the agency and the client. Additionally, some opponents argue that the commission system does not take into account the actual costs of media and production, which can lead to inefficiencies and a lack of transparency in the agency-client relationship.

Question 10

Under which of the following compensation arrangement is the agency compensation tied to their performance?

Accepted Answer

In an incentive-based system, the agency's compensation is tied to their performance. This means that the agency will receive additional compensation if they meet or exceed predetermined performance targets.

Question 11

Agency compensation under the commission system is based on:

Accepted Answer

Under the commission system of agency compensation, the agency receives a specified percentage of the cost of any advertising time or space the agency purchases for its client. This percentage can vary, but it is typically around 15%. This system incentivizes agencies to negotiate lower rates for media placements to maximize their own earnings, but it can also create a conflict of interest between the agency and its client.

Question 12

A major argument put forth by defenders of the commission system is that a commission:

Accepted Answer

The statement "is simple and keeps the emphasis in agency compensation on non-price factors" suggests that commission system defenders believe that a commission system is easy to administer and rewards agencies for their performance beyond just the cost of media.

Question 13

Under which type of compensation system might an agency be more inclined to recommend expensive media such as network television and national magazines to its clients?

Accepted Answer

In a commission system, the agency earns a percentage of the cost of the media purchased by the client. Therefore, the agency may be more inclined to recommend expensive media in order to increase the overall cost and earn a higher commission.

Question 14

A(n)______ is a type of compensation arrangement where an agency charges a client a fixed monthly amount of money for all of its services and credits to the client any media commissions earned.

Accepted Answer

The description matches a fixed fee compensation arrangement where the agency charges a fixed monthly amount to the client for services and credits any media commissions earned.

Question 15

Which of the following statements is true about agency commissions?

Accepted Answer

Some leading agencies now receive average commissions of 8 to 10 percent, which means that nearly all of them do not still earn a 15 percent commission. It also suggests that commission rates are negotiable and that agencies are diversifying their income sources beyond fixed commissions. The statement about leading agencies often getting 20 percent commissions is not supported by the information provided.

Question 16

The traditional method of compensating ad agencies is through:

Accepted Answer

The traditional method of compensating ad agencies is through a commission system, where agencies earn a percentage of the media costs for the advertisements they place.

Question 17

Negotiated commission rates for advertising agencies:

Accepted Answer

Negotiated commission rates for advertising agencies are becoming more commonplace. This is due to the increasing competition in the advertising industry and the rise of alternative compensation models. Advertisers now have more options to pay agencies, such as project-based fees, hourly rates, and performance-based compensation. Therefore, negotiated commission rates are becoming less standard and more tailored to individual client needs.

Question 18

Under the _____ system of compensation,the client agrees to pay the agency a fee based on the costs of its work plus some agreed-on profit margin.

Accepted Answer

The described compensation system is known as "cost plus," in which the agency is reimbursed for its expenses plus an agreed-upon profit margin.

Question 19

The DDB Needham advertising agency receives compensation from its clients based on their sales and market share performance.This is an example of a(n)_____ compensation system.

Accepted Answer

The compensation system described is based on the performance of the client's sales and market share, which is a value-based system. This means that the agency is rewarded based on the value it brings to the client's business, rather than just charging a fixed fee or commission.

Question 20

Independent companies that specialize in the purchase of radio and television time are known as:

Accepted Answer

Independent companies that specialize in the purchase of radio and television time are known as media specialist companies. These companies are separate from the creative boutiques, full-service agencies, mid-sized agencies, and media boutiques. Media specialist companies are solely focused on media planning and buying, and work closely with advertising agencies or directly with clients to purchase media time and space at the most effective rates.

Quiz 1: Organizing for Advertising and Promotion: the Role of AD Agencies and Other Marketing Communication Organizations