How to Explain an Ad Agency Gross Margin

Advertising agencies design, create and place advertisements for clients. Ad agencies can specialize in specific ad types, such as magazine ads or print ads, or they can offer a mix of service options. Because advertising agencies do not sell physical products the way retailers or manufacturers do, their gross margin can be challenging to explain. When explaining your ad agency's gross margin, walk your listeners through the various elements that go into the gross margin formula, focusing on how each element is unique in your agency.

Pricing Policies

  1. Begin by explaining what you charge your clients for different jobs and why. Explain how you arrive at individual price quotes for each job you take on, including considerations such as the different lengths and depths of advertising campaigns, the types of resources employed to create advertisements and your major competitors' price points. Along with demand, pricing is a key element influencing a company's total gross revenue. In your explanation, focus on how you use your pricing to attract customers from your target market.

Gross Revenue

  1. Share your gross revenue numbers, and explain the elements that make up your gross revenue figure. Ad agencies can bring in revenue in different ways. Some agencies may bill clients regularly for an hourly consulting fee, for example, while others may require up-front payment in full to take on new campaigns. Discuss how much of your gross revenue is received in cash and how much is made up of credit sales to give your listeners a clearer understanding of your cash flow.

Media Buys

  1. Begin explaining your direct costs by discussing the cost of buying media in bulk or on an as-needed basis to place ads for your clients. Full-service ad agencies do not stop after creating advertising materials; ad-agency services often include media sales from an "inventory" of pre-purchased advertising space, streamlining the ad placement process and ensuring that ads can be aired, printed or displayed according to the campaign timeline.

Direct Materials

  1. Discuss any direct costs for advertising materials, including sign-printing costs, billboard ads, ads on vehicles, sky banners and other ads that require physical media not paid for by a media outlet. The cost of printing a magazine ad, for example, does not count as a direct cost because the magazine publisher will cover this expense. However, the cost of printing signs for a sign-spinning campaign would most likely be the agency's responsibility.

Gross Margin

  1. After explaining all of the variables that make up your gross margin, share your gross margin figure. Use the following formula to calculate your gross margin:

    ( sales revenue -- direct costs ) / sales revenue