Let's ditch net-gross billing

By Published on .

We could be wrong, but we do not think there are any businesses operating today in America whose employees are working by candlelight and writing with quill pens. And we highly doubt there are any companies whose employee cafeterias use big blocks of ice as a means of refrigeration.

Then why in the world are those of us in the advertising business still using the billing method known as net gross? This "standard practice" that has been used since the early days of our industry is every bit as archaic as the daily delivery from the ice man. Net gross is a practice that is, at best, confusing and, at worst, makes it easier for an unscrupulous agency to bilk clients. It is something that affects advertisers large and small, and it's time for it to stop.

Executives on both the agency and client sides of the business know full well that confused and dazed look on the faces of clients when the phrase "net gross" enters the conversation about billing and budgets. The conversation usually goes something like this:

Agency: What is the media budget?

Client: $1 million.

Agency: Is that net or gross?

Client: Huh? What the heck is net gross?

Once upon a time, in a bygone age, net gross made sense. Agencies were compensated 15% for services rendered, so it was a logical and time-saving procedure for media to simply tack on 15% to the net figure to simplify the billing process for the agency.

But, as we all know, the age of flat 15% compensation has gone the way of those quill pens. Today, agencies are usually paid negotiated fees for their services. Yet we continue to have these confusing net gross discussions that add no value to the business and waste precious time; time that could be better spent by the agency on conducting more productive tasks on the client's behalf.

do the math

How confusing can net gross be? Consider this: The negotiating vernacular between media buyers and media sellers is usually based on gross. Meanwhile, as noted above, the agency-client conversation on dollars is usually based on net. So, in order for media buying negotiations to begin (remember media buyers and sellers talk in gross), net dollar budgets communicated by clients to agencies must be grossed up. Here is the formula: Convert net to gross by dividing net by 0.85. Thus, a net budget of $100 translates to a gross budget of $117.65. Conversely, a gross budget must be multiplied by 0.85 to derive the net figure.

Do you know that millions of invoices from TV and radio stations, magazines, newspapers and other media outlets detail net and gross dollars every year? There is a ton of "netting down" and "grossing up" math happening out there.

Whew! It is easy to imagine the potential for mistakes in "grossing up" or "netting down" figures, mistakes that could cost the advertiser money or, at the very least, create unnecessary billable time. Further, and this is not to suggest this is being done, but the confusion over this issue could lead an unscrupulous agency to show gross numbers and still bill the client the agreed upon fee for services rendered.

Every year around the time of the TV upfront, we read trade-press stories quoting media buyers on their opinions about the upfront being archaic and no longer necessary in today's TV world. Yet no one ever mentions the outmoded nature of net-gross billing, which is something advertisers and agencies are living with every day of the year. To continue to work this way because "this is the way it's always been done" is, frankly, dumb and inexcusable.

In its "Guidelines for Effective Advertiser/Agency Compensation Agreements," the Association of National Advertisers and American Association of Advertising Agencies reaffirmed that the best compensation programs match remuneration with the resources required to do the work. In other words, the flat 15% compensation figure is dead. The report acknowledges that commission-based compensation sometimes still takes place, but points out that: "Commission-based systems can be inappropriate, especially for low-spending brands, certain specific media types, niche markets, new-product introductions and when the scope of work includes significant integrated-marketing services that have little or no commissioned media."

Interestingly enough, Internet media buyers and sellers opted for the most part to go with net figures across the board. This forward-thinking should be adopted by traditional media as well, but the impetus for change is going to need to come from agencies and clients.

It's odd that while pretty much the entire industry agrees that commission-based compensation is either not the way to go, or if it is then rates are to be negotiated on an account-by-account basis, no one seems to be speaking out about the net-gross 15% markup issue.

It's time to begin a movement to banish this subject to the artifacts section alongside the icebox and quill pen. Let's move our billing practices into the 21st century.


Michael Katz is senior VP-wholesale division, Totes Isotoner Corp., Cincinnati. Regina Lithen is senior VP at Empower MediaMarketing, a Cincinnati-based media planning and buying agency.

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