It’s not news that many agencies make a lot of money from media planning and buying to most marketers. It’s been in the open for decades. It’s widely reported they make more money from non-client income derived from client media spend than from the fees they charge.
Globally, this has been common practice for 30-plus years (France passed Loi Sapin in 1993 to curb rebates). In the U.S., the topic went mainstream after Jon Mandel’s 2015 call-out and the ANA’s media transparency work (1). And the headlines keep coming, recently Paramount’s disclosures (2) and WPP allegations (3).
Nor should it be a surprise how agencies earn beyond fees: rebates (media, tech, data), principal or “inventory” media, markups on pass through costs, payment-timing arbitrage, unbilled media, retention and interest on unbilled cash held, equity rewards for spend, and barter/content financing. Then there’s the softer “additional value” gained from media and tech companies: free space brokered to clients, agency teams funded by media owners, discounted or free tools tied to conditional spend, training, hospitality, entertainment, and so on. These benefits are reportedly earned by leveraging client budgets, but they don’t always flow back to clients.
However, knowing this and fixing it are different things. Our analogy: it’s one thing knowing where the bodies are buried, a different thing digging them up, and a third knowing what to do with a stinking corpse.
So what should advertisers do? How do they protect media plan quality (planned without conflicts of interest), buying performance, and tech choices and pay agencies fairly?
And how do they avoid the “triple dip”?
The triple dip is when some agencies charge fees for planning and buying (dip one), use the client’s media money to earn non-fee income (dip two), and they demand a bonus for buying results (dip three).
Here it is illustrated with fictional numbers. A fictional advertiser spends $100 million. The agency charges $5 million in fees. It then earns another $6 million from leveraging the remaining $95 million through rebates, principal trading, interest, unbilled media, tech/data markups, “free” inventory, and the rest, and keeps it. It then claims a further $1 million “performance” bonus. Net-net, the agency has made $12 million; the client thought it was paying $6 million. And the client believed $94 million hit working media, when only $88 million did, once you strip out the hidden $6 million.
At Flock, we get paid to sort out these issues, so we can’t publish every playbook and still have a business. But for the good of advertisers, media companies that want to be true agencies (not principal-based arbitrage platforms), and media owners, we believe the industry needs clearer best-practice disciplines. And, it starts with people.
1. Talent
Have smart in-house media specialists overseeing one of your biggest investments. If you can’t build the capability, hire a specialist consultant. Ask yourself: does your team understand media economics as well as the agency across the table?
2. Governance and guardrails
Have a company strategy for media, not just media strategies for brands. Put robust policies in place for agency management, technology and data, planning and buying, and measurement. Build processes so plans must be solution-neutral and cannot be quietly skewed toward the agency’s commercial interests.
3. Transparency and auditability
Demand visibility into who is doing which deals, how they are done, and who benefits. Require clear reporting of rebates and every other form of non-fee income connected to your spend. Secure the right to audit, and actually use it (sometimes unexpectedly).
4. Adtech and data clarity
Have an adtech and data strategy. Know what tools and data are being recommended, the agency’s cost, your cost, and any other income the agency may earn from your investment.
5. Choose what your media company is buying
Do you want an agency acting as your agent, transparent in all dealings, or a principal-based media company that trades on your money and may generate additional income? Be clear about the trade-offs for both, they’re not the same.
6. Contract, accountability, and incentives
Is your media company an agent or a principal in the eyes of the law? How are conflicts handled? Does the contract require visibility of all income streams connected to your spend and define how benefits are returned to you? Where an agency executive makes an assertion, consider requiring a written, personal legal guarantee. Lawyers and accountants tend to think hard before personally guaranteeing, in writing, that no rebates or other client-funded income exist.
Also, benchmark fees. If you use incentives, tie them to business outcomes and exclude media where the media company is also paid by the seller, so you don’t hardwire the triple dip.
Putting these disciplines in place can improve a client’s media ROI. It may also encourage agencies to return to making their income primarily from client fees, turning their gaze back from the dark moon to the bright sun.
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