Production mark-ups on production cost is still one of the most common and yet the most flawed way to remunerate an agency.
By production mark-up, we understand a percent on the cost of production that the agency adds to this third party cost in order to manage the production process and to choose the production vendor. This mark-up is added to all production costs, especially external costs. This is particularly common on printing and can become a significant amount that adds to the agency revenue without lots of effort and resources needed.
The advantage of course is, that it is easy to negotiate as it can easily be pre-agreed upon. They should then cover the producer or production resources needed to service the specific campaign production. It, however, becomes a lot more vague and difficult if the concerned agency has internal production units.
Another disadvantage is that it does not really incite the agency to select the supplier that provides the best value because they benefit from choosing the one that is highly priced.
Of course the resources needed to follow-up on the production process must be paid to the agency. But we strongly recommend not to use the production mark-up as the remuneration model to do so.
You want to know more about alternative remuneration schemes ? Call us to discuss your objectives.