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Calculating the real cost
Art of Commercials
by Hooper White
Advertising Age Magazine, March 19, 1984

The question I am asked most often is "how much does the average commercial cost to produce?"

In a way, that's like asking, "how much is a house?"  But, as with houses, there are certain criteria that can help arrive at averages.

What often is forgotten is the list of elements that come together to give you the gross cost of a commercial.  The advertiser doesn't pay what the production company charges.  Far from it.  That's the tip of the iceberg.  The final gross cost is usually between 30% and 70% above the production company's firm bid.

So, when a production company arrives at a bid of say, \$60,000 to do all the pre-production work, direct and shoot a commercial to all of its final visual elements, the client will actually pay approximately \$100,000.

Before going any further, see the accompanying chart for typical production elements that make up that \$100,000 commercial production to fill 30 seconds of airtime.  That's how a \$60,000 commercial costs the client \$100,000.

I'm not saying that any of the elements in the bid are incorrect.  But I am saying that many people within production companies and advertising agencies do not see the final costs of production that the client must pay, therefore they underestimate the total cost of production.

Quite often, these gross figures are studied by only three people: The business person at the agency who grosses the various net costs as they come into the agency from various sources, the account person who has to present the bill for approval to the client and the advertiser.  In many instances no one else actually producing the commercial is completely aware of these grossed costs, and doesn't completely realize why the advertiser may be complaining about them.

I know from experience that many smaller agencies will be surprised at many of these figures.  For instance, many smaller agencies do not commission the costs of production.  They may add per diems for production supervision, however.

Many smaller advertisers will be knocked right out of their socks by all the above numbers, which might represent their entire tv advertising budget for the year.

But, by this same rule-of-thumb, a commercial that grosses to the production company at \$100,000 will often gross to the advertiser at more than \$150,000.  And, as the commercial becomes even more expensive to produce, a \$200,000 production company bid can very easily approach \$400,000 when the gross estimate goes to the client for approval.

How do the totals get so high?  Partially because of multiple markups.  Items that are listed as a separate company in the above example include that company's markup.  In other words, there are six separate markups in that bid, including the production house (usually at 35%) and the agency (at either 15% or .1765).

Part of the problem occurred many years ago when the production company was no longer asked to do the editing and finishing of the commercial.  This added a separate profit markup.  This division of responsibility has added to the final cost to the client.

And, as noted in my last column, if the actual production of the commercial is further divided because one company does the live-action, and a different company does the computer graphics, another markup is added.

All of the above is offered as an explanation - not a criticism.  We have to accept the world as it is, and in today's production world, much of the top-drawer production is done on this somewhat fractionated basis.

However, as you go to "second-tier" production centers like Minneapolis, Boston, Indianapolis and Atlanta, you will find that many of the film and videotape production companies still take their work through from start to finish - from production through editorial to finishing.

Does all of this mean that work should leave New York and Hollywood and go to second tier cities?  Not necessarily.  The talent in all phases of the production industry flows to where the top work is - and that still means New York, Chicago and Hollywood.  And top talent usually gets a top price in any business.

What it does mean, at least to me, is that the people involved in the agency creative/production process must be aware of the gross cost of their effects, as well as the net cost.

There will continue to be a problem until the creative director realizes that the "tight" bid from a production company will have elements added to it that will bring the client's cost up 35% to 60%.

So, when the advertiser says, "I have this much money to spend on producing commercials this year," the management of the smart advertising agency will pass this message along to the creative department:

"You have 40% less than you think you have to produce those commercials this year.  Do you really need all that music?  How about those sets.  Would locations work out as well?  And do you really need 10 on-camera actors to make the commercial a successful selling vehicle?"

All of which is to say that cost-efficiency in the creative department is the responsibility of the creative director - and should be addressed long before the commercial production cost package is presented to the advertiser for his approval - or rejection.

The cost chart
(classroomtools.com note: This article was written in 1984.  I'm told that some costs have inflated significantly since, others have deflated.)

1. Production company firm bid ...............................................................\$60,000
2. Music production (a separate company) ...................................................8,336
3. Editing/finishing (a separate company) .......................................................6,100
4. Color correction (a separate company) .....................................................1,200
5. Talent: 1 principal, 4 extras and voiceover (includes residual use) ...............5,850
6. Pension and welfare (per union rules) ...........................................................532
7. Studio recording (a separate company) ........................................................700
8. Artwork ......................................................................................................600

Net subtotal ...............................................................................\$83,318
Agency commission on the net subtotal .........................................14,706

1. Sales tax .....................................................................................................600
2. Messenger ..................................................................................................200
3. Agency travel ...........................................................................................1,300
4. Talent travel (1st class) .............................................................................2,420
5. Employee tax 14% ......................................................................................745

Gross total (net subtotal, plus agency commission, plus lines 9-13) .......\$100,869