What are the Key Points to Check in a Contract with an Internet Advertising Agency?

According to a survey published by Dentsu in February 2019, internet advertising expenses accounted for 26.9% of Japan’s total advertising expenses in 2018 (Heisei 30), amounting to 1.7589 trillion yen. From the advertiser’s perspective, the use of internet advertising is increasing year by year due to its affordability and the ability to efficiently target specific audiences.

With this in mind, we will explain the key points of the contract that internet advertising agencies enter into with advertisers.

Explanation about Internet Advertising Agencies

What is Internet Advertising?

Internet advertising, as the name suggests, refers to advertisements displayed on the internet. The most common type of these are listing ads (search-linked ads), which are displayed preferentially in search engine results. In addition to these, there are also display ads that appear in ad spaces on websites. For more detailed information about listing ads, please refer to the article below.

https://monolith.law/corporate/listing-ads[ja]

Internet advertising differs from traditional advertising mediums such as television and magazine ads in that it can be started with a small budget. More importantly, internet advertising allows for the use of data collected by search engines, such as the attributes and search history of internet users, to display ads only to users who are likely to be highly responsive. This ability to target ads so precisely is a unique advantage of internet advertising.

For detailed information about regulations on advertising health food products, please refer to the article below.

https://monolith.law/corporate/points-for-supplement-advertising[ja]

The Role of Internet Advertising Agencies

When an advertiser wants to place an internet ad, they would typically request the search engine to display a listing ad. For display ads that appear in ad spaces on websites, the advertiser would request the media rep of a primary agency that has purchased the ad space from the website.

In this process, the internet advertising agency acts as an intermediary between the advertiser and the search engine or media rep, coordinating between the two. Specifically, the advertising agency hears from the advertiser about the content and target of the ad, as well as the results they aim to achieve through the ad, and then places the ad with the search engine or media rep under conditions that align with the advertiser’s intentions.

Since search engines and media reps generally place ads mechanically based on these conditions, it is crucial for the advertiser that the advertising agency has expert knowledge about internet ad placement.

It should be noted that companies have the option to manage their internet advertising in-house. This is sometimes referred to as “in-house” operation. However, in-house operation often falls short of advertising agencies in terms of expertise and staffing, and many companies do not have a large number of staff dedicated to managing internet advertising. Therefore, there is a high risk that operations may come to a halt if the person in charge leaves the company.

In other words, the involvement of an advertising agency can be justified by its ability to secure a sufficient number of staff with expertise in internet advertising.

Key Points in Contracts with Internet Advertising Agencies

When an internet advertising agency receives a request for ad operations from an advertiser, a contract is created. We will explain the key clauses in this contract. In the clause examples mentioned below, ‘Party A’ is the advertiser and ‘Party B’ is the agency. For more detailed information on general outsourcing contracts, please refer to the article below.

https://monolith.law/corporate/regulation-of-outsourcing-contract[ja]

Clause on Scope of Work

Article X (Scope of Work)
The Party A entrusts to the Party B the tasks specified in the appendix from the following list, and the Party B accepts this entrustment.
(1) Initial work related to advertising placement (selection of keywords, etc.)
(2) Advertising placement agency and operation work (addition or deletion of keywords, review, etc.)
(3) Consultation on budget and changes in advertising placement, etc.
(4) Other matters necessary for advertising placement and operation

The most important aspect of a contract between an advertising agency and an advertiser is the clause defining the scope of work that the advertising agency will undertake. However, it is generally common to detail the specifics of the work not in the main body of the contract, but in an appendix attached to the contract.

Clause on Advertising Fee Payment

Article X (Advertising Fee)
1. Party A shall pay to Party B the amount of the operation for the current month, which has been reported and confirmed based on the preceding paragraph, by the end of the following month, to a bank account separately designated by Party B.
2. Party B shall operate so that the operation amount stipulated in the preceding paragraph becomes X yen or more.

This is a clause regarding the advertising fee when the advertiser entrusts the operation to the advertising agency.

There are two methods for the advertising fee to be operated: the method where the advertising agency pays the advertising media in advance and the advertiser pays the agency later, and the method where the advertiser pays the advertising agency in advance. The former method, where the advertising agency pays in advance, is relatively common, so the first paragraph of the above clause assumes this case.

However, in cases where there is no financial leeway to pay the advertising fee in advance, such as at small advertising agencies, it is necessary to ask the advertiser to pay in advance. This point depends on the negotiation between the advertiser and the advertising agency, so be sure to check thoroughly before concluding the contract.

Also, as will be explained later, if the advertising agency receives a certain percentage of the operation amount as a reward, there is a risk of a deficit if the operation amount is too low. Therefore, as an advertising agency, it is necessary to consider setting a minimum amount for the advertising budget. The above clause stipulates the minimum amount of operation in the second paragraph.

Clause on Payment of Compensation to Agencies

Article ○ (Compensation)
Party A shall pay Party B an amount equivalent to 20% of the operating amount for the current month (excluding tax) as compensation for the performance of duties by the ○th of the following month.

The clause regarding the compensation that the advertising agency receives from the advertiser is important.

In addition to the method of determining the compensation as a certain percentage of the advertising expenses operated as in the draft clause, there is also a method of setting a fixed amount regardless of the operating amount. Furthermore, there is also a possibility of a success fee system where the compensation is calculated by multiplying the target conversion unit price by the number of conversions.

Provisions Regarding Reporting to Advertisers

Article X (Reporting)
The Party B shall report to the Party A on the performance of the work for the current month by the Xth day of the following month, either in writing or by email.

It is common for advertising agencies to be obligated to regularly report to advertisers on the results achieved through the operation of listing advertisements and the like.

The method and frequency of reporting can be freely determined as long as the advertiser and the advertising agency agree. However, as an advertising agency, it is often the case that reports to advertisers with small remuneration are limited to about once a month, and the method of reporting is often by phone or email rather than by visit.

On the contrary, when receiving a large amount of remuneration, it may be considered to increase the frequency of reporting and to adopt a format that explains in person to avoid trouble with the advertiser. Although it is not included in the above clause proposal, there may be a clause regarding reporting other than regular reporting, such as “the advertiser can request a report on the performance of the work at any time” from the advertising agency. However, there is a limit to the range that can be handled if the remuneration amount of the advertising agency is small, so it is necessary to carefully judge whether to make a report other than regular reporting.

Clause on Account Information Disclosure

Article X (Account)
1. If Party B uses their own account to perform work, unless otherwise agreed between Party A and Party B, the ownership of the account shall belong to Party B. However, Party B is obligated to disclose all information related to the account upon request by Party A.
2. If Party B uses an account owned by Party A to perform work, the ownership of the account shall belong to Party A. However, during the effective period of this contract, Party A shall grant Party B the right to use the account.
3. In the case of the preceding paragraph, upon termination of this contract, Party B must return all information related to the account to Party A.

It is necessary to create an advertising account when operating listing advertisements.

There are two cases regarding the advertising account: when using an account prepared by the advertising agency (Article 1), and when using an account created by the advertiser (Article 2). Even when using an account created by the advertising agency, it is common to disclose all account information to the advertiser. Since the advertiser is the one paying for the advertising expenses to operate with the account, this can be considered inevitable.

The first paragraph of the clause proposal is based on this idea. On the other hand, in cases where the advertiser has been operating in-house until now, the advertising agency may take over and use the account that the advertiser was originally using. In this case, the advertising agency needs to receive permission from the advertiser to use the account (Article 2). Also, after the contract ends, the advertising agency needs to hand over the account information to the advertiser (Article 3).

Summary

The internet advertising agency industry is expected to continue experiencing rapid market growth. Not only large advertising agencies but also freelancers with specialized knowledge can enter this field, so the number of new entrants is likely to increase further in the future.

However, unlike traditional advertising methods such as television and magazine ads, internet advertising automatically selects the optimal target and allows them to view the ads. Due to this nature, advertisers cannot actually see and confirm how much their ads are being displayed on various media. Therefore, to avoid disputes with advertisers, it is crucial for advertising agencies to clearly define the scope of services they provide and how they calculate their fees, leaving no room for doubt.

Contract Creation and Review Services by Our Firm

At Monolith Law Office, we leverage our strengths in IT, Internet, and business law to provide a wide range of services, including the creation and review of various contracts, not only for internet advertising agencies but also for our client companies and advisory firms.

If you are interested, please see the details below.