05 April 2016
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Digiday recently published a very interesting article titled ‘It’s like a game of whack-a-mole’: Rebates persist in ad buying”. It talks about the recurring practice of agencies keeping a portion of their client’s media spend. Moreover, this article refers to the US market, not Europe or certainly Latin America where these practices are much more common.
According to the article, agencies continue to find ways of legally making rebates from media companies. The article then goes on to explain that nowadays agencies are not getting cash back but free inventory from media companies, and it is this free inventory which they later sell to their customers. As someone who has worked in Media and in Digital Media for the past 20 years in the Latin American market, I know this is true and even more pronounced in Latin America than in the USA.
Where I disagree, at least from a Latin American perspective, is that the article implies that this is the agencies’ fault or that they are not “playing by the rules”. However, I actually believe this situation is mostly the fault of the advertisers not the agencies.
I just came back from a trip to Europe where I visited the Grand Bazaar in Istanbul. Good luck finding price transparency there! Haggling is as much of a pain as it is actually part of the Bazaar’s charm. But I can imagine that at one point at least one stall owner tried to put a fixed price with a fair profit margin. What do you think happened? Buyers probably continued their practice of haggling the price down, and the stall owner probably lost the sale if he did not lower the price. Eventually he probably reverted back to the usual practice of marking up his products so he could discount them fiercely.
Something similar has happened in the advertising industry in Latin America, and continues to happen. In pitches, most advertisers are selecting the agency which charges them the lowest fee; in many cases agencies offer to work with no fee at all! No one can survive without making a profit so clearly everyone knows there are rebates involved. However, in the past 5 years many large advertisers have stipulated in their agency contracts that all rebates have to be returned to the advertiser, so the agencies have to charge higher fees or continue to find ways of making a margin on the media they buy on behalf of their clients. If they cannot charge higher fees, what do you think they have to do?
Many advertisers and even media professionals complain about these rebates, but if the mark-ups were that huge you would expect agencies making a lot of money. The opposite is true –operating an agency is very challenging, and their profit margins are actually very low. Publicly traded companies such as WPP, Publicis, and Omnicom have net profit margins that are less than 10%. WPP’s net profit margin in 2018 was 4.1%! In addition to low margins, at least in Latin America, most media agencies have to finance their client’s media buying. As advertising budgets shift more and more to digital, this makes it even harder for them because traditional media companies provide both higher rebates and longer payment terms. In the case of digital media, agencies have to pay publishers in 30 to 60 days when their clients pay them sometimes in 90 to 120 days.
Given this scenario, how can advertisers complain when they suspect there is no neutrality in agencies’ buying decisions? Quoting the same article:“The big issue now for advertisers is the neutrality behind the planning of their media investments.”
Many would say that all parties are to blame, but I think that advertisers shoulder most of the responsibility because they are the final Buyers, they are the ones who have more power in the chain and they are the ones who can change this dynamic. If I were a marketing director at an advertiser , I would do a pitch where the fee is not even negotiated. I would tell them that I would guarantee them a 30% gross margin on their cost structure, and instead I would evaluate the agencies based on their strategy, the resources they think they need to service my account, and the results they think they can achieve for my company. As a result, I think my agency would not have to waste energy and resources trying to negotiate complex inventory deals with media companies, and have to live with the conflict of interest of buying the media that produces the best result for me vs. what is most profitable for them. Advertising is not a cost item; it is an investment, and therefore my priority is not to lower the agency fee but to achieve the most out of my marketing budget. Some agencies and advertisers, especially those focused on digital advertising and performance are already working like this but they are in the minority.
Going back to my Grand Bazaar example, advertisers should stop focusing on negotiating the price (or agency fees) to the lowest levels and instead work with true transparency with their agencies, pay a fair fee, and make sure that their agencies have no conflicts of interests. They have the power to do so. In my 20 years in the industry, I cannot believe this has not happened yet. My hope is that the shift towards digital advertising is creating so much margin pressure that the industry will either change or break. Changing is much easier (and fair for the agencies and better for the advertisers as well).
