Marketing Math Blog

Jul 02
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AI Has the Power to Boost Advertisers Working Dollars. Will It?

By Advertisers, Artificial Intelligence, Digital Media, Working Media No Comments

artificial_intelligence“Automation is no longer just a problem for those working in manufacturing. Physical labor was replaced by robots; mental labor is going to be replaced by AI and software.” ~ Andrew Yang

What do ad creation, programmatic customization, personalization, audience targeting, predictive analytics, performance reporting, and fraud prevention have in common? The adoption of Artificial Intelligence (AI) has already demonstrated the ability to enhance advertising performance while reducing the time-on-task in these areas for agency creative, production, and media teams.

Consider Digiday’s recently published article citing a case history for The Brandtech Group indicating that its generative AI platform had the ability to produce ads “10 times faster, deliver twice the performance and cost 30 to 50 percent less.”

When it comes to media, Group M recently predicted that “AI-enabled media buys will account for 94.1% of all ad spending by 2029.” This indicates that there will be a significant shift in how media planning and buying will be executed, reinforcing the need for advertisers and agencies to adapt their approach to realize the resulting efficiencies and media performance improvements.

AI’s ability to automate routine tasks and efficiently process reams of data will reduce the time and resources required by agencies to service their clients. Consequently, AI can play a key role in lowering the fees advertisers pay to their agency partners and AdTech intermediaries, thus increasing working ad spend.

Forrester recently issued its Agency AI-Powered Workforce Forecast, 2030 (US), predicting that “by 2030, US ad agencies and related services companies will lose 32,000 jobs to automation, 7.5% of the total agency workforce.” The potential labor savings is not limited to the advertising industry, according to McKinsey, “by 2030, activities that account for up to 30 percent of hours currently worked across the US economy could be automated” as a result of the adoption of generative AI.

From an agency perspective, the automation of labor-intensive, repetitive jobs will eliminate certain roles. Thus, agencies will seek to protect their revenue by effectively harnessing AI to consolidate their share of ad spend across their client base. For example, WPP recently announced a “Production Studio” application using generative AI and a content engine recently developed with Nvidia that will create “text, images, and video” for advertisers.

Advertisers must move swiftly and with purpose to proactively engage their marketing services providers to discuss AI’s potential impact on upcoming scopes of work along with the corresponding agency staffing plans and resource investment needs. Questions regarding how and when AI will be deployed and what the effect will be on various creative, media, and operational processes should be discussed in detail. The resulting feedback will allow advertisers to ascertain the potential for in-housing certain tasks and realigning responsibility for specific roles and project work across their agency network.

In conclusion, there can be no doubt that AI is poised to significantly transform the advertising industry. AI’s ability to optimize, and innovate how advertising is created, delivered, and monitored will certainly be a game changer. By taking the lead on the integration of AI into their workflows, advertisers can reduce their reliance on agency services and lower the amount of time and resources required by their agencies to create and manage ad campaigns. In turn, this will lower fees as a percent to total ad spend, improving advertisers’ working dollars.

Jun 20
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How Will Generative AI Impact Client/ Agency Relationships?

By Artificial Intelligence, Client Agency Relationship Management No Comments

This article from DigiDay provides a glimpse into the future impact of generative AI on the ad industry: “Pencil’s ads are produced 10 times faster, deliver twice the performance, and cost 30 to 50 percent less.” While it remains to be seen what the impact will ultimately be on agency service delivery and remuneration, changes will be forthcoming … Read More

Jun 20
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Transparency. All Talk, No Action?

By Programmatic Buying, Media Transparency No Comments

Excellent piece in AdExchanger on the talk around transparency and change in digital advertising. The author’s perspective accurately captures the state of affairs regarding transparency, particularly as it relates to programmatic media: “…the open programmatic marketplace is not where serious advertisers and agencies buy ads, nor where reputable media owners sell their inventory.” As Mr. De Zanche aptly states: “effective outcomes cannot be achieved if only pockets of the industry are embracing change.” … Read More

Jun 04
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Agencies Should Act in The Client’s Best Interest. Always.

By Advertisers, Advertising Agencies, Principal Media No Comments

principal mediaClient/Agency Relationships were once predicated on the concept of a principal-agent relationship, where the agency had a fiduciary duty to act in their clients’ best interest. When this concept was the accepted practice, most Client/ Agency agreements reinforced this expectation.

Principal-agent relationships helped instill a level of trust among client stakeholders creating strong partnerships between advertisers and their agencies that spanned years, if not decades. Unfortunately, over time, certain agency practices began to erode that trust.

The shift began with agency holding companies pledging funds entrusted to them by advertisers to select media sellers to earn rebates that were based upon the holding companies aggregate spend across their client portfolio, and funneling work to affiliates without competitively bidding their services. Then came principal media buying, an arbitrage process whereby the agency or their affiliates would purchase media and resell it to clients at a higher rate, earning non-disclosed mark-ups that were often unauthorized by its clients. In these scenarios, agencies act as principals, rather than agents, often prioritizing their own financial interests at the expense of their clients.

Recognizing the growing use of principal media among agencies, the Association of National Advertisers (ANA) conducted an in-depth analysis of this practice titled “Acceleration of Principal-Media.” As part of its study, the ANA identified key characteristics of principal media, including the following:

  • The agency or its affiliate is not an agent of the client. The agency is the reseller of the media or other service.
  • Clients are often unaware of where or how the agency acquired the inventory.
  • The agency is delivering media where the actual price (if any) is not disclosed, and the agency markup is not known.
  • Advertisers have limited audit rights. Notably, clients are not allowed access to associated vendor invoices.

None of these characteristics are particularly confidence-inspiring, even if an agency secures the client’s permission to engage in principal media buying. So why would an advertiser even consider authorizing this practice? The key selling point is typically the ability to reduce costs on select commodity-like media.

Some believe that this approach can play a role in an advertiser’s arsenal if they enter these arrangements with a modicum of knowledge and with the requisite controls in place to mitigate the attendant risks. However, the ANA’s study found that more than half of the survey respondents were only “somewhat familiar” or “not familiar” with the practice. Further, in our contract compliance auditing practice, we find that most advertisers lack the appropriate contract language or controls to safeguard or vouch their advertising investments in principal media buys.

One might reasonably ask: “Is principal media buying ever acceptable, even with the appropriate controls in place?” The inability of advertisers to audit principal media performance, the lack of transparency regarding agency costs and profits, and the limited ability to vouch for the quality of the inventory could be reasons enough to forgo the use of principal media. More importantly, advertisers will never know whether their agency’s principal media recommendations are genuinely in their best interest or driven by the agency’s profit motives.

Absent full cost transparency, audit rights, agreed upon mark-ups, and pre-approval rights for principal media advertisers should rightly favor a principal-agent relationship, with clear accountability and alignment on the agency’s duties and responsibilities as a fiduciary of the client versus the pursuit of illusory efficiencies.

“Media arbitrage or principal media involves the manipulation of price differences in different locations on the same inventory to achieve a riskless benefit to the principal.”

May 29
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Where Do You Stand When It Comes to Principal Media?

By Marketing No Comments

ANAThe Association of National Advertisers (ANA) recently released its report on principal-media, a practice where agencies take ownership of the media and resell it to their clients at at a price higher than what was paid. As a marketer, short of preventing your media agency from utilizing principal-media on your behalf, there is a solution to protect your organization from the unauthorized use of this practice… sound contract language, independent auditing of media agency partners, and strict controls around the approval granted to purchase principal media. If you have questions regarding this practice, sometimes referred to as media arbitrage, you will find the following article from The Media Leader to be of interest … Read More

 

May 29
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Do Agency Revenue Models Raise Concerns Among Marketers?

By Marketing No Comments

riskShould marketers be okay with non-transparent agency revenue practices, as long as they are acknowledged?

When it comes to principal-based buys the marketer bears all of the risks for the potential to “improve efficiencies” that cannot be wholly substantiated. Can a marketer ever really know the impetus behind an agency’s recommendation for principal-based media decisions and whether or not it is in the client’s or the agency’s best interest?

Interested in learning more about the Association of National Advertisers (ANA) recent report on how “agency holding companies profit from media sales to clients?”…Read More

 

Apr 30
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Finding Gold Through Quarterly Business Reviews

By Advertisers, Advertising Agencies, Client Agency Relationship Management, Marketing No Comments

money“If one does not know to which port one is sailing, no wind is favorable.” –  Lucious Annaeus Seneca

Marketing is a complex, demanding, and time-consuming endeavor that deals with both strategic and executional elements. Often the resulting tasks seem to outnumber the time and resources available to address each effectively.

Once the annual planning process is complete and budgets are approved, marketers and their agency partners typically plunge headlong into implementing the strategies and programs that comprise those plans. There are deadlines to be met and stakeholder expectations to be addressed. So, it is seemingly tough to justify another meeting, additional reporting, or vouching for each agency partners financial management performance. Yet, this may be just what the doctor ordered to optimize marketing spend and keep all parties aligned on the organization’s goals and expectations.

The use of quarterly business reviews (QBRs) fosters critical dialog between cross-functional teams on both the client and agency side regarding key business strategies, challenges, performance expectations and opportunities that arise over the course of the budget year. Properly structured, QBRs help to ensure that both sides are aligned on the business and relationship priorities established at the beginning of the year. Further, they help to satisfy corporate governance standards for marketing budgets that represent a material expense.

Ideally, the financial leadership team is applying an appropriate level of pressure and installing strict requirements to improve transparency and accountability regarding a firm’s marketing spend. Yet we know that agency performance vouching simply does not receive the attention it deserves. Marketers can and should involve their peers in procurement, finance, and internal audit to assist in structuring and implementing quarterly reviews to complement the weekly status updates, monthly performance tracking discussions and financial management reporting that regularly occur. This type of cross-functional participation also helps to create buy-in and build confidence in an organization’s agency partners.

Further, involving financial team members from the agency in this process yields incremental benefit and provides the agency with the opportunity to broaden its relationship with the client. Experience reinforces that agency team’s welcome open communication and the opportunity to discuss and share feedback on business challenges and goals that occur in QBRs.

More than just an accountability tool, QBRs enable brainstorming and idea generation opportunities that can help refresh the organization’s marketing and advertising efforts… all the while building a basis for stronger client/ agency relationships.

Apr 02
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Advertisers: Lost Interest Income Opportunity

By Advertisers No Comments

agency holding company profitsAs of this writing, the prime rate or the interest rate charged by banks to their best customers for loans is 8.5%. (source: Wall Street Journal Prime Rate Survey, March 26, 2024). This is up significantly from 2015, when the prime rate was 3.5%.

There was a time when Client/ Agency agreement language contained provisions binding the Agency to always conduct itself as a fiduciary, acting in the best interest of the advertiser and prohibiting the agency from earning any income on the use of client funds. Today, many such agreements don’t specifically address these two issues.

Understandably, the times have changed to a degree, specifically as it relates to practices such as principal-based media buying where the agency may forgo its fiduciary obligations (theoretically with the client’s prior written approval). Further, advertisers have been less vigilant when it comes to securing the requisite protective language and implementing the appropriate financial stewardship practices when it comes to their agency agreements.

This is particularly concerning given that the “estimated billing” process remains the dominant mode of charging practice when it comes to agency billing for third-party expenses. In short, estimate billing entails the agency invoicing the advertiser often in advance of performance and ahead of third-party vendor billing so that it is in possession of client funds when it is time to process payment to those vendors. Then, once a campaign has run or a production job has been closed, the agency reconciles estimated costs to actual and where appropriate issues a credit to the advertiser.

Unfortunately, the timing for agency media invoice reconciliations and production job closings can run upwards of 180 days post agency billing to advertisers. This combined with agencies holding unbilled media funds, rebates, and incentives often until ninety days post year-end and advertisers may be forgoing significant interest income opportunities resulting from their funds being held at the agency, rather than by client finance teams.

The good news is that these risks can be mitigated by taking some straightforward steps relating to an advertiser’s investment. For example:

  • Requiring agencies to reconcile and pay third-party vendor invoices within 30 to 45 days of the end of the month of service, rather than relying on indeterminant contract language such as “Agency will use commercially reasonable efforts to promptly remit client’s payments to third-party vendors.”
  • Establishing “job closing” timing and reconciliation guidelines with each agency partner.
  • Tightening up “unbilled media” reconciliation practices from 30 to 90 days end-of-year to 60 days end of quarter.
  • Identifying monthly financial reporting formats to estimate and track any “rebates, incentives, and credits” earned by the agency or its holding company related to the use of advertiser funds.
  • Establishing contract language prohibiting the agency from earning any income on the use of client advertising funds.
  • Consider moving from an “estimated” to a “final” or “progressive” billing process that allows advertisers to maintain tighter control of their funds.

Interest income opportunities, cost of capital, and improved treasury management controls are all factors that advertiser financial management understands and values and should be a foundational element of Client/ Agency agreement and relationship management practices. 

“Money is always eager and ready to work for anyone who is ready to employ it.” ~ Idowu Koyinikan

Mar 05
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Agency Compensation Models: It’s About Time

By Agency Compensation, Agency Fee & Time Management, Featured No Comments

punch clockThe advertising industry has long wrestled with the challenge of determining the optimal manner and level of compensation between advertisers and their agency partners.

While there is little in the way of consensus on the best approach or normative data on the appropriate rate, the Association of National Advertisers (ANA) 2022 “Trends in Agency Compensation”  survey found that labor-based fees remain the predominant mode of remuneration. Further, the gap between labor-based fees and other approaches (e.g., value-based compensation) has widened. Of note, the survey identified the fact that advertisers “increasingly questioned” whether the use of performance incentives to complement fee arrangements had a positive effect on agency performance.

Ever since the industry moved away from the commission-based compensation model that was in place through the 1980’s there has been interest in a range of different remuneration solutions including the following:

  • Labor-Based Fees where agencies charge for the hours required to complete a given statement of work, with hourly bill rates assigned by function. Of note, these bill rates compensate agencies for their direct-labor costs, overhead, and a negotiated profit level.
  • Commission-Based Compensation, which is most typically used in the media buying area, pays agencies based upon a percentage of the advertiser’s media spend.
  • Value-Based Compensation where agency remuneration is directly linked to the attainment of actual results, regardless of the time or effort required on the part of the agency.
  • Performance-Based Compensation most often used to complement other fee arrangements, providing agencies with additional incentive to pre-determined KPIs.

Additionally, there are variations on each of these approaches along with hybrid compensation models that integrate aspects of two or more remuneration schema (i.e., labor-based fee for media planning, commissions paid for media buying for media agency partners).

One of the key challenges faced by clients and their agency partners when it comes to outcome-based approaches is the difficulty with identifying the proper metrics for assessing agency performance. This is even more challenging for advertisers using multiple agencies when it comes to attributing in-market results to a particular partner’s efforts.

The goal for clients and agencies has always been straight forward. Identifying a compensation model and rates that fairly compensate agencies for their resource investment, while aligning their efforts with the client’s expectations and desired business outcomes.

While no two relationships are the same, there is one truth that has guided agency compensation in the post-commission era ad agencies, like consultants, attorneys, and accountants provide professional services. The fact is that the most prevalent manner of compensating these providers is linked to one common denominator… the time required for the service provider to deliver against a pre-determined set of deliverables.

Thus, we believe that labor-based fee compensation is and will remain the most viable and least contentious mode of agency compensation. Why? The basis for developing these fees is straightforward, linking the time spent by specific employees at agreed upon hourly bill rates. Further, employee hours are the basis for agencies when internally assessing labor utilization rates and client profitability. The good news is that virtually all agencies track employee time at the job or campaign if not task level thus providing a stable basis for monitoring an agency’s resource investment against a particular statement of work.

Importantly, this approach lends itself to full transparency and is highly flexible for both advertisers and agencies to deal with changes in scope or the need to access/ deploy specialized agency resources. Even with the myriad of changes being ushered in by technology advancements, labor-based compensation models provide advantages over the subjectivity and attribution challenges inherent with outcome or performance-based compensation models.

In the end, good faith dialog between clients and their agency partners to clearly articulate expectations and to assess the resources required to achieve a mutually agreed upon set of outcomes is the key to developing fair, mutually beneficial compensation arrangements.

“The best compensation for doing things is the ability to do more.” ~ Napoleon Hill

Feb 02
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How Will AI Impact Agency Business Models & Compensation?

By Advertisers, Advertising Agencies, Artificial Intelligence No Comments

KeysArtificial Intelligence (AI) is poised to reshape the advertising industry.

Based upon the speed with which AI is being adopted and the potential applications across multiple advertising functions it is not a question of “if,” but “when” these changes will take root.

The ability of AI to analyze behavioral data rapidly and comprehensively to inform or make decisions is profound and will directly impact tasks including marketing planning, market research, media planning, performance optimization, and ad operations.

When it comes to content Generative AI can both generate new ideas, create, and personalize content. One result is that there will likely be a reduced need for creative department time-on-task in this area.

As it relates to implementing AI, there are a few basic questions for advertisers and their agency partners to address in the near-term:

  • How will the agency deploy AI across its various functions? When?
  • What will the impact be on the hours and people required to deliver agency services?
  • What type of talent and training are required to implement AI?
  • Will we rely on the agency or look to implement AI solutions in-house?
  • What are the costs associated with implementing AI? At the agency? In-house?

The answers to these questions will impact client/ agency roles and responsibilities, future scopes of work and the fees paid to the agencies.

From an agency perspective, particularly those whose compensation is tied to direct labor-based fees, there will be concern that any reduction in scope and or hours expended in areas impacted by AI will lead to a reduction in revenue. For advertisers, the expectation will be that there are both operational and administrative time-of-staff efficiencies to be realized.  

It is clear that AI will lead to an evolution in the agency business model that impacts service delivery, staffing and talent needs, and remuneration. According to Forrester, ad agencies will automate 7.5% of jobs out of existence by 2030. The reduction in an agency’s billable hour base will obviously vary depending on the type of agency (i.e., digital specialist, creative, media, etc.). According to some industry pundits, Forrester’s estimate of 7.5% could be on the low side of the potential for lost jobs.

Time is of the essence. According to a survey conducted by Statista in 2023 among professionals in the U.S. “37% of those working in advertising and marketing had used AI to assist with work related tasks.” How should advertisers begin the AI “readiness” planning process?

A good starting point for AI “readiness” planning is to assess historical agency time-of-staff investment by function relative to past scopes of work to allow both parties to understand the potential impact post AI implementation. This analysis should be conducted, even though agencies will likely advance recommendations for implementing a different compensation schema (i.e., value-driven pricing, outcome-based fees, etc.).

Concurrently with the historical benchmarking, advertisers should engage their agency partners in discussions about AI can positively impact brand engagement with their customers, enhancing the customer and prospect experience with the brand at each point of contact. Once there is concurrence on a customer focused outcome and an historical context, discussions regarding efficiencies and effectiveness can follow.

“When deploying AI, whether you focus on top-line growth or bottom-line profitability, start with the customer and work backward.” – Rob Garf, Vice President, SalesForce