When Pivotal Research Group recently downgraded many of the advertising Holding Company shares from hold to sell, the market was shocked. Especially as this was driven by the huge revelation that media agencies within these holding companies were receiving undisclosed payments from media owners.
But why such a shock? We had been advising our clients this was happening for more than three years. Perhaps the events with MediaCom Sydney had brought the whole thing well and truly into the open. But the fact is, this has been an issue festering away behind the scenes for many years.
Since then the ANA has launched a review into the media buying process in the USA and now there is more than $22 billion in media up for pitch too. So how did it end up like this?
Media buying involves three in the bed – advertiser, media agency and media owner – but what is really happening to the advertiser’s budget under the covers?
The fact is that when it comes to media buying there are three people in the bed:
- The advertiser
- The media agency and
- The media owner
And while they were all getting what they wanted, it worked. But then someone had to get greedy.
It seems that most marketers are not aware of the fact that they are sharing their media bed not just with the media agency but also the media owners. And the fact is that in this bed it is a case of the Golden Rule prevailing.
You see the advertiser may have the gold, but according to the WFA, on average global advertisers were paying their media agencies an effective 3% commission for traditional media planning and buying and just 6% effective average commission for digital planning and buying.
Meanwhile on the other side of the bed the media owners were in much better shape to be able to influence where that media investment would land. You see traditional media owners would routinely budget up to 30% of revenue to be used as discounts, added value or sales incentives in the form of rebates.
Digital media owners, who were not encumbered by the huge cost of creating the media content in the first place, routinely budget up to 80% of revenue for the same reason. Of course much of this goes to the intermediaries between the advertiser and the publisher, including the media agency.
It is because most digital media inventory does not have the cost of running a television station or printing and distributing a newspaper or magazine or the radio station programming used to attract the eyeballs and ears of the customer.
Therefore if you were in the middle of the ménage e trois and one side was someone cashed up but demanding you keep less and less and the one on the other side was someone who was offering to give you more back the more you gave them, what would you do?
Procurement driving down fees
We took a phone call from the procurement team from a major global company. The team is based in China and wanted to discuss ‘benchmarking’ the media agency fees across the region.
This is a major advertiser and even the agency fees came to many millions of dollars. It became apparent very quickly they did not want to actually benchmark when one of the procurement people asked how much we could save them. I responded that we were not sure if we could save anything at this stage. We would need to review the current fee and it is possible that our recommendation is that they are not paying enough.
They were shocked and told us that one of our competitors had guaranteed a minimum 10% reduction in the media agency fee and that they were going to be paid half of these savings as their fee.
It was now my turn to be shocked. I confirmed what they had just told me and then sarcastically offered to reduce the media agency fees across the region by 100% if they were happy to pay me half of the savings? Excitedly they asked if I was serious to which I answered “No!” and hung up.
The fact is that if marketing is not driving down the agency’s fees then procurement is definitely giving it a red-hot go. And as you see this is effectively transforming you from the person who makes the rules into the person who gets left out of the action.
Marketers lacking understanding
My experience is that while many marketers have worked to stay abreast of the changes in media due to technology, some and especially those in the most senior roles are being left behind.
Like the CMO who called to ask if we could provide a benchmark for their digital media. I was unsure as to what he required and in the discussion he said “You know, like a cost per thousand.” This led to a longer conversation about the advice he was getting from his agency.
Or the Head of Marketing who wanted to pitch for a new agency to handle their digital media as he was not currently seeing any of their advertising on-line. I asked where he was mainly looking and he said on their website at work. The conversation went on to explain it was likely that the agency was blocking the IP address for his place of work (that was a whole other issue) and that it is unlikely they would serve ads to the company website anyway.
Plus there is the Senior Marketer who was concerned that their digital media placement was poor because they would often see ads served up against editorial on a competitor’s product. They even suggested I go online to see the ad myself and could not understand why I suggested that I would not necessarily be served the same ad.
I know this may appear a little over the top. Except all of these did happen with senior marketers at large organisations. And it is these same senior marketers and advertisers who are often making decisions on how the media agency is engaged, remunerated and how their performance is measured.
The fact is that to effectively manage the performance of your media agency you need to understand how they operate so you ask for the right outcomes, measure the right performance and remunerate them in the right way for delivery of that performance.
Agencies under pressure to perform
There is a new book being released at this year’s Cannes Creative Festival titled Madison Ave Manslaughter by Michael Farmer. In it Michael shares his belief on the failings of the Holding Company model.
The agency holding companies have to meet and exceed the revenue and profit expectations of their investors. Many of these are large institutional investors. As I said at the start of this article, the market was shocked when Pivotal Research Group downgraded the Holding Company shares based on the news on media agency behaviour.
This is because the financial performance of the agency was once upon a time directly linked to the performance of the advertiser. When the advertiser was doing well they invested more money in advertising and the agencies’ revenue and profit went up with it.
But now there is pressure within agencies to increase their revenue and their profits year on year irrespective of the advertiser’s financial performance. In fact since the global financial crash of 2008 it could be said in spite of it.
At a time when advertisers are looking for ways to reduce their advertising and marketing costs, the management at the major agencies owned by holding companies, are under relentless pressure to deliver growth and get their bonuses and promotions.
There is a conflict of interest here and somewhere between the holding company quarterly and half yearly reports and the day to day agency / client relationships the tension in this conflict plays out.
Where to from here?
While it is clear that many major advertisers believe they can fix the issue by running a pitch to select a new media agency or to negotiate a new set of terms and conditions with their incumbent, it could be that they end up just changing deck chairs on the Titanic. We have hit an iceberg and the ship is going down.
Instead advertisers and agencies should:
- Define the role of both parties in the media value chain.
- Agree terms and conditions that encourage transparency and compliance.
- Reward agencies for delivering value, not just reducing costs.
The fact is that the advertiser should be able to leverage the golden rule and define the rules by which the media agencies and media owners play. But this means understanding the media value chain in a rapidly changing market and being willing to reward agencies for the value they derive and deliver from the media owner. Otherwise it will invariably be more of the same.
This post is by Darren Woolley, Founder and Global CEO of TrinityP3. With his background as analytical scientist and creative problem solver, Darren brings unique insights and experiences to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimization.