Media agency incentives are a farce and hurting your business

Peter Morgan explores the current state of media buying, and why agency incentives could be hurting your business

I enjoy my job for many reasons, one of which is the window it provides to the marketing practices of leading B2B brands. I specialise in demand generation, so naturally I pay close attention to how these brands buy media.

Some B2B media programmes run beautifully, delivering measurable returns through the sales funnel. Others run less well, with marketers unable to demonstrate – or even understand – the impact of their investments.

A common thread in these poorly performing programmes is the reliance on commission-based pricing for media buys.

This payment model is a remnant from the 19th century that somehow lives on in the digital age, and in B2B tends to result in gross wastage and a frustrated and unsupported marketing team.

An old-world model no longer fit for purpose

Commission-based pricing dates to the 1870s, established by US advertising pioneer Francis Ayer. His agency, NW Ayer & Son, pioneered the ‘open contract’ – moving the typical agency model from selling ad space on behalf of publishers, to buying ad space on behalf of advertisers.

Ayer negotiated deals with the media that set commission at 15%. This commission was only provided to agencies, ensuring they kept their piece of the pie – as there was no advantage for advertisers to buy direct. This competitive advantage held true until 1956, when an investigation by the US Department of Justice deemed it unfair – resulting in a level playing field for all ad buyers.

Agencies are a stubborn bunch, however, and 60 years later commission-based pricing is still alive and well in many media buys.

While it is undoubtedly easier to administer than models based on time or deliverables, there is a fatal flaw. Commission-based pricing incentivises an agency to spend money: the more of its client’s money an agency spends, the more money it earns.

Commission provides agencies with a fundamental conflict of interest

John Mandel, once CEO of media agency Mediacom, highlighted this conflict of interest in a 2015 speech to the Association of National Advertisers (ANA). He claimed media agencies “cross the line of acceptable conduct in a partnership. They are not transparent about their actions. They recommend or implement media that is off strategy or off target if it works for their financial gain".

The unintended consequences of commission pose a threat to all marketers, but the risks are most keenly felt in B2B where a product’s target market is typically far smaller than in B2C.

If Coca-Cola’s media agency was incentivised to buy in bulk, the risk is relatively low: most people who see a Diet Coke ad could realistically buy the product. The same isn’t true for vendors selling niche, high value B2B solutions. If your agency is incentivised to spend budget as fast as possible, you risk broadening your audience pool beyond likely buyers – and this typically leads to significant waste.

Digital techniques have added to the confusion

Adding to the challenge for marketers are the opaque buying systems that characterise digital media buys – and can lead to clients paying twice for the same work.

In a 2016 Marketing Week column, Mark Ritson raised examples of media agencies being paid legitimately by clients to purchase media on their behalf, while simultaneously earning undeclared kick-backs paid by the vendors who supply the media.

To illustrate his point, Ritson drew a comparison to home renovation work.

“What if the flooring [the builder] selected was sub-optimal for my needs and picked purely because it offered a significantly better kickback?”

“And what if, when I asked him why he bought that particular flooring, he did not reveal the superior trade discount that he was offered on that product and claimed instead that it was the quality that won him over?”

While the issue of kickbacks isn’t new, the situation has worsened due to the growth in digital spend. Ritson goes on to quote Deborah Morrison, from the UK advertisers’ association ISBA, claiming that increased digital spend has led to advertising buying becoming “more and more opaque”.

Media agencies are backed in a corner and only have themselves to blame

Relying on kickbacks from the media supply chain has allowed agencies to reduce fees, but their clients suffer the consequences.

Mark Ritson has thoughts on that too, venturing that media agencies will be unable to raise fees again “because they (not client procurement teams) were the main agent in reducing them in the first place".

Lower fees equal less time to service your account, and less investment in expertise. The impact on B2B marketers is apparent: generalist media agencies typically lack knowledge of their clients’ complex audiences, products, and buyer journeys, and they lack the expertise required to interpret and act on data.

I’ve got a window seat on the consequences, and it isn’t pretty

I’ve heard agencies bragging of reaching millions of business decision-makers in markets where there are only a few thousand.

Others are unable to distinguish between key metrics such as clicks and visits (a clue: you get a lot more of the former than the latter).

I’ve even seen an agency shift reporting from weekly to monthly on a Fortune 500 account spending a million dollars a month. Can you imagine the waste? Monthly, or longer, course correction of media spend will mean weeks of budget flushed away into media networks and agencies.

Media agencies are left celebrating exaggerated metrics and award wins. We believe marketing success should be defined by business outcomes.

The media agency model is designed to fail: it’s time we move on

Let’s re-examine the facts.

Media agencies which rely on commission-based pricing are incentivized to spend as much money as possible. This fails both clients and their audiences.

Opaque buying systems have simultaneously allowed agencies to reduce fees, earning money from arbitrage and hidden kickbacks – a position they will struggle to recover from, resulting in decreasing levels of service.

Finally, marketers are waking up.

The emergence of consulting firms as a serious alternative to the traditional media agencies is precisely because of these issues. (For those unaware: four consultancies have already cracked Ad Age's ranking of the 10 largest agency companies worldwide).

The media industry is on final notice: clean up your act or your days are numbered.

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