Marketing Math Blog

Aug 23
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What Do You Know About Your Ad Agency’s Use of Affiliates?

By Related Parties, Advertisers, Advertising Agencies No Comments

Line of SightDo your client-agency agreements require your agency partners to disclose their use of related parties? To secure your permission prior to engaging affiliates? To document how those affiliates are compensated?

If so, then you are in a better position than many. At a minimum, testing for agency compliance to such contractual requirements is an option that you can pursue. If not, the level of work being channeled to related parties by your agency may surprise you.

In our contract compliance and financial management audit practice, it is not uncommon to see 5 to 7 different related parties engaged by an advertiser’s agency. Examples of services provided by affiliates include items such as barter, programmatic buying, direct response TV, event marketing, principal-based buying and ad serving. Yet, oftentimes these affiliates and the manner in which they are compensated are not known to the advertiser.

Why should an advertiser care? For one, if work is assigned to an agency affiliate without undergoing a competitive bid process, what assurance can the advertiser have they are not being charged above-market rates? Secondly, the added profitability by recommending certain affiliates, such as those engaging in the procurement and resale of media inventory through principal-based buys or barter, could adversely influence an agency’s recommendations to the advertiser. And to compound matters, if said affiliates are also applying non-disclosed mark-ups to the media inventory procured or services provided, can an advertiser fairly assess whether the total fees the agency is generating from its business are commensurate to the services being delivered?

Thus, it is important to revisit contract language to ensure that the following controls are in place:

  • Principal-Agent language that requires the agency’s fiduciary responsibility is to the advertiser and that all decisions and actions are undertaken in a manner that maximizes benefits to the advertiser.
  • Require the agency to disclose any and all related parties that it intends to deploy on the advertiser’s behalf and to secure the client’s prior written approval. Requiring quarterly updates to this list would provide an added layer of protection.
  • For instances where principal-based buys, barter or other non-disclosed transactions are being considered, require a double opt-in process:
    • The first step would be a formal letter of notification from the agency to be signed by the advertiser granting permission.
    • Secondly, any purchase authorization form presented by the agency to the client for approval should reiterate the agency’s intent in this area.

With these agreement guardrails in place, advertisers can further protect their interests by periodically auditing the agency to validate compliance and verify the accuracy of charges made by and or for related party activities.

Ultimately, this approach will allow an advertiser to leverage the full breadth of its agency partner’s resource offerings in a very transparent manner, providing comfort that its agency’s practices are aligned with its expectations.

Aug 11
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Madison Avenue Moves Toward “Free Agency”

By Advertising Agencies, Agency Compensation No Comments

ad agencyInteresting findings from Horizon Media’s study on post-pandemic employment trends. As Madison Avenue rethinks the concept of “agency” and the potential use of independent workers versus employees, the industry will also have to come to grips with the impact on current remuneration models. With direct-labor based agreements dominating the current compensation landscape, the attendant formula of direct salary costs + benefits + overhead + profit does not readily extend to “free agency”… Read More

 

Aug 03
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Agency Remuneration: Project-Based vs. Retainer

By Agency Compensation No Comments

CashIdentifying the right methodology and optimal rate at which to compensate advertising agencies has been an ongoing quest for advertisers. With the shift to project-based versus retained relationships this, driven in part by a desire for greater flexibility and responsiveness this challenge has intensified. As always, the question remains; “What rate can advertisers expect to pay under different agency remuneration models? Does a greater commitment lead to more efficient rates?” The following article from Leah Montebello of Producers & Procurers iQ presents an excellent framework for fairly evaluating this scenario. Read more…

 

Aug 03
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The Insanity of Digital Media

By Digital Media No Comments

Oli Orchard, Founder of Fuel Media & Marketing a London based media consultancy and auditor recently published a LinkedIn post featuring this comic strip by Tom Fishburne. While funny, Mr. Fishburne’s take on digital media is sadly reflective of reality. In spite of the risks and questions around the “true” effectiveness of digital media, advertisers continue to increase both absolute dollars and share of spend on digital media in general and programmatic in particular… which is fraught with an even greater level of risk. Controls and rigid monitoring are cost of entry for advertisers in this area and in spite of the money being spent on adtech solutions, the scenario captured in this comic strip is as real today as it was when originally published years ago.

Digital Media

Jul 28
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A Key to Rebuilding Client – Agency Relationships

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

Bias and ObjectivityThe state of client-agency relationships has been on the decline for several years. Whether measured in terms of longevity, the increase in project-based work versus retained relationship commitments or the waning level of advertiser trust in their agency partners, all of these important partnerships are under pressure.

Regardless of the reasons behind the current situation, this is not a healthy dynamic for either advertisers or agencies. The result has been shorter, more volatile relationships, higher levels of agency personnel turnover and some would argue less effective, less efficient advertising outputs. Reason enough for both sets of stakeholders to thoughtfully assess the current situation and seek corrective action.

There is, we believe, a clear starting point for improving client-agency relationships. It involves a return to the tried and true “principal-agent” business model that once formed the basis for relationships between advertisers and agencies. The woes currently besetting these partnerships and driving advertiser concerns over transparency and trust are direct outcomes of the industry’s deviation from this important principle and the resulting practices that are averse to this model.

A basic tenet of principal-agent relationships is that the agent is bound to make decisions and to take actions that are in the best interest of the principal…always. This, in turn, guides interactions between the parties in a manner that achieves the highest possible degree of accountability and ultimately trust.

It wasn’t long ago that all client-agency agreements contained language establishing the principal-agent relationship, the need for agencies to provide unbiased counsel and the resulting fiduciary obligations of both parties.

Sadly, agency compliance with and commitment to this framework began to wane within the agency community. Some may remember the controversial comments by Irwin Gotlieb, once CEO of WPP’s Group M who opined at the 2015 “Agency Financial Management” Conference hosted by the ANA: “Those relationships, rightly or wrongly, don’t exist anymore” he said, adding that “You cease to be an agent the moment someone puts a gun to your head and says these are the CPMs you need to deliver.” Blaming advertisers for the bad practices adopted by some agencies was inappropriate at best.

Even with contractual safeguards in place, problems occur when “agents” have hidden agendas or substitute their interests over those of the principal. This is why the topic of “media rebates” secured and retained by media agencies, without client knowledge or approval proved to be such a lightning rod topic when it initially surfaced.

Fast forward to the present and certain revenue-generating practices that are pursued by many agencies such as principal or inventory buys (media arbitrage), acceptance of incentives from third parties (i.e. rebates, value pots, EPI’s, etc.), agencies awarding work to their holding company affiliates without a competitive review or client authorization, and the application of non-disclosed, unauthorized mark-ups.

Whose interests are being served by such practices…certainly not the advertisers. To paraphrase Shep Gordon, Hollywood producer and talent manager:

“I think a problem for most people in a fiduciary capacity is to eliminate self and greed and all those things so that they can actually be in a fiduciary capacity where the client comes first, whoever the client happens to be.”

Advertisers must protect their legal and financial interests by crafting contract language and implementing the appropriate controls, including performing periodic audits. How else can they ensure that they have the transparency they seek in the context of their agency partners’ financial stewardship of their advertising investment and the confidence that their agencies are acting in their best interest?

On the topic of principal-based buying specifically, we have a contrarian perspective and don’t believe that it is ever appropriate for an agency to purchase media inventory in its name, mark it up by some undisclosed amount and re-sell that to its clients. Yet, these non-disclosed buys have proliferated as programmatic digital media buying has exploded. While the 4A’s issued guidelines to address this practice including documentation requiring client opt-in, explanation of an advertiser’s audit rights (if any) and access to the underlying costs, oftentimes agreement language is silent on these recommendations or they are simply not followed in actual practice.

Thus, if both parties want to establish trust and rebuild the client-agency relationship, begin by eliminating the risk of bias in an agency’s recommendations and or actions and reinforce the principal-agent framework in agreement language.

Jun 28
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What Role Will Media Agencies Carve Out for Themselves?

By Advertisers, Media No Comments

mediaPoint of fact: The media marketplace is evolving at a pace never previously experienced.

While consumers have a dizzying array of choices for accessing content, ad sales are dominated by a handful of media ownership groups. According to a recent GroupM report, the “Top 10” firms accounted for 55% of global ad revenues in 2020. Of note, the “Top 5” firms (Google, Facebook, Alibaba, Amazon and TikTok owner ByteDance) represented 46% of global ad sales during this same period.

In the U.S., the world’s largest ad market, digital media represented 62.9% of U.S. media spend with 88.1% of digital display spend being placed programmatically in 2020 (source: eMarketer). Not surprisingly, Google, Facebook and Amazon increased their share of the U.S. digital market to almost 90% in 2020 (source: GroupM).

Top media ownership groups such as Comcast, Disney, ViacomCBS and AT&T have expanded their offerings to advertisers on a direct basis to include media space/time, content, product integration, experiential support, audience research and production services… somewhat reminiscent of the days of full-service advertising agencies.

And finally, media planning and buying decisions are becoming more highly automated as AI-powered algorithms and machine learning continues to expand their role in the advertising and media sector. This in turn has spurred advertiser investments in AI marketing, totaling over $6 billion in 2019 (source: Statista).

The question to be asked is, “How will media agencies distinguish themselves and their client offerings to protect their share of the media services market?”

This is an important topic, one which is surely being discussed within the major ad agency holding companies. Why? Media agency contributions to agency holding company financial performance are significant. This has been particularly so with the growth of digital media over the last decade-plus. According to Ad Age Datacenter, digital work in 2020 accounted for 58% of 2020 U.S. revenue for agencies from all disciplines. Yet, overall revenues for U.S. ad agencies have been lackluster at best, with low single-digit growth in 2017, 2018, 2019 and a 6.8% drop-off in 2020.

For advertisers seeking to boost campaign performance, improve media ROI and reduce time-to-campaign launch times, they will inevitably evaluate a range of approaches to planning and placing their media budgets. These may include adding consolidating their media agency networks to achieve better integration and improved leverage, in-housing certain aspects of the media strategy and or placement processes to improve efficiencies, working directly with media ownership groups and a host of other alternatives.

In a dynamic, evolving marketplace marked by uncertainty, the onus is clearly on media agency management to defend their role as gatekeepers and stewards of client media spend. Perhaps agency leadership can draw some inspiration from the words of American educator and the founder of Stanford University, David Starr Jordan: “Wisdom is knowing what to do next; skill is knowing how to do it and virtue is doing it.”

 

 

May 15
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What Is the Basis for Variable Commission Rates?

By Agency Compensation No Comments

questionUntil the late 1980s, agency remuneration models that were based upon commissions charged on ad spend were typically universally applied across media types. As alternative media channels began to expand, agencies began to charge variable commission rates, based upon media type.

The question to be asked is “Why?” and, is this approach still appropriate?

Presumably, planning, buying, and monitoring certain types of media required more time on the part of agency personnel and or certain experience levels, thus the higher rates. It is fair to question whether or not that premise still holds true. The most obvious area to question is the higher commission rates charged for programmatic advertising, which utilizes automated technology to execute and monitor media buys as opposed to traditional, manual buying methods.

Unfortunately, advertisers that employ a commission-based agency pay-model typically don’t see agency staffing plans or time-of-staff reporting. Thus, the ability for an advertiser to assess the resource level required to plan and place its media mix is limited at best.

Another concern regarding the variable commission rate pay-model is the potential for the higher rates charged for certain media types to bias an agency’s media mix recommendations. The possibility that an agency would approach the allocation process with the goal of optimizing its revenue, rather than the advertiser’s media investment certainly exists.

So, what should advertisers do? The answer is straightforward. Require their media agency partners to submit formal staffing plans, with an estimate of hours and utilization rates by employee/ position along with their annual commission rate schedule… just as they would with a retainer or labor-based fee compensation method. Further, advertisers should require agencies to provide monthly time-of-staff reporting, so that both parties can assess the resource levels, staff seniority and experience required to execute the scope of work.

With clear insights into an agency’s staff investment, advertisers can now knowledgeably adjust their remuneration programs, if needed. The goal, as always, is to equitably compensate media agency partners to effectively plan and execute an advertiser’s media program, while eliminating bias and optimizing working media levels.

Advertisers would be wise to heed the words of Oliver Markus Malloy, the German American novelist and to analyze the impact and efficiency of their variable commission rate compensation programs more closely:

“We live in this bubble of ignorance. Most people know nothing about history, or the historical context of the traditions they still follow today. People do things without knowing why they’re doing them.” 

Apr 30
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Ad Industry Launches Programmatic Media Probe

By Ad Fraud, Digital Media, Programmatic Buying No Comments

ANAThe Association of National Advertisers (ANA) recently announced that it will commission a study to identify ways to address the myriad of issues plaguing the programmatic marketplace. Both the ISBA and World Federation of Advertisers (WFA) are supporting the effort.

Citing ongoing concerns regarding “thin transparency, fractured accountability, and mind-numbing complexity” the ANA believes that these issues, combined with the percentage of digital spend going to cover fees charged by ad tech intermediaries, are costing advertisers billions of dollars per year. By their estimate “only 40% to 60% of digital dollars invested by advertisers find their way to publishers.” Of the funds that do reach publishers, a recent study by the ISBA found that “15% of budgets simply disappear without a trace” supporting thin transparency claims.

 

For perspective, according to Zenith Media, 65% of U.S. digital media is placed programmatically. For perspective, advertisers spent approximately $139 billion on digital media in the U.S., representing 54% of total media spend.

Unfortunately, the promise of improved efficiency and effectiveness related to programmatic has yet to be realized. With evolving privacy regulation and a higher incidence of fraud (fake traffic) to add to the lack of clear insight into the fees charged, true inventory costs and placement quality, it is difficult to explain the rapid growth of this form of buying. Yet it seems there is no turning back as programmatic buying has become dominant in digital and expanded to other media types as well.

Despite these challenges, many media pundits suggest that traditional metrics for evaluating media success (i.e., impressions, clicks, views, completed views, etc.) are not apropos for assessing the efficacy of programmatic. They argue that in the end, it is all about actions and outcomes. However, a Google Ad Manager study found that an increase in video ad viewability, for instance, from “50% to 90% can result in a revenue uplift of over 80% (averaged across desktop and mobile).” No one would argue that views and outcomes cannot occur without exposure to real people and legitimate human traffic.

Thus, with advertisers continuing to fuel the growth of programmatic buying across media types, the timing could not be better for the ANA’s initiative to investigate this sector of the media marketplace.  As the 1st century BC writer and philosopher, Publilius Syrius once said: “It is better to learn late than never.”

Apr 21
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Fraud & Privacy Regulation Create Digital Media Challenges

By Ad Fraud, Digital Media, Privacy Protection No Comments

ChallengesDigital media’s value proposition is the ability to more finitely target audience segments, moving beyond traditional demographics, leveraging deterministic user data to paint rich, behavioral-based customer profiles, delivering a marketer’s message to those customers inexpensively, at scale.

This dynamic resulted in the rise of U.S. digital media spend from $26 billion in 2010 to $139 billion in 2020 (source: IAB/ PwC).

Yet recent developments, including increased regulatory activity surrounding consumer data privacy protection (GDPR, CCPA) and the resulting moves away from the use of third-party cookies to track website visits and collect consumer data to help marketers target their messages, have exposed some challenges related to digital media and customer targeting that the industry must now contend with.

The primary issue going forward is the fact that the major browsers have stated that they “will not use alternate identifiers” to track consumer web browsing activity. Further, consumers remain distrustful of sharing personal information, which has significantly thwarted marketers’ opt-in efforts, limiting their personalization and targeting strategies.

Secondly, data brokers and data management platform (DMP) providers may offer little credible support in this area. In a recent Forbes article entitled, “How Accurate is Programmatic Ad Targeting” Dr. Augustine Fou suggested that few AdTech providers “have users that voluntarily provide” demographic information. This means that the targeting “characteristics or parameters that a data broker or DMP has on users are derived.”

Thirdly, digital media fraud continues to limit marketing optimization efforts. In their 2021 “Marketing Fraud Benchmarking Report” Renegade and WhiteOps profiled some of the outcomes experienced by marketers whose databases have been corrupted by fraud. These include:

  • Website traffic spikes, not connected to new content
  • Steep increases in traffic associated with marketing campaigns
  • Wide variances in time-on-site metrics, depending on traffic source
  • Lower than expected conversion rates
  • Diminishing quality of in-bound leads

The primary cause behind these occurrences is fraudulent bot activity. In addition to skewing digital media audience delivery and campaign performance indicators, this fraudulent activity has also corrupted consumer databases. Thus, marketers may experience difficulty in determining what percentage of their target profiles and contacts are real or fraudulent, leading to ineffective and expensive retargeting and profiling efforts.

The alternative being suggested by many is to fall back on contextual marketing. In short, placing a marketer’s advertisement in the most appropriate context (e.g. adjacent to the most relevant content). This means either working with publishers and websites directly accessing their first-party data to target advertising based upon user activity and content preferences to shape ad targeting decisions or, in the case of ad networks, serving up ads based upon page content, keywords and metadata.

Unfortunately, some browsers such as Google will not allow advertisers to access contextual content categories and or identifiers to inform their ad targeting efforts. Additionally, one important trade-off of contextual targeting is that data is not collected on the user for use in creating buyer profiles or in predicting future behavior and thus has little value in establishing targeting parameters or in remarketing.

With 54% of U.S. media spend being allocated to digital and 65% of that being programmatic (source: Zenith Media), marketers and their advisers have their work cut out for them as they navigate the new digital playing field.

 

Mar 30
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We Know We Should Audit, But…

By Advertising Agency Audits, Contract Compliance Auditing, Marketing Accountability No Comments

HesitationWe’ve all seen the look on the face of an anxious toddler as they prepare to jump into the waiting arms of a parent in a pool.

The child wants to leap, knows there is little risk, trusts their parent and knows that the feeling of satisfaction related to their action will far outweigh their apprehension, yet they hesitate to take the plunge. This scenario can be analogous to organization’s considering an independent contract compliance audit of an advertising agency partner.

Managers’ go through a series of considerations when weighing whether or not to conduct an agency compliance and financial management review, including:

  • It’s not that we don’t trust our ad agency partners
  • It’s not that we don’t believe our agencies are putting forth their “best efforts” to safeguard our marketing investment
  • It’s not that we don’t have confidence that our marketing team is effectively safeguarding our marketing budget

But…

  • We have never audited this aspect of our SG&A
  • Marketing spend is a material expense
  • Our C-suite executives are asking questions regarding risks and controls
  • Over time, our agency roster has grown and spending has increased
  • We read the trade press and are concerned about fraud, brand safety, adherence to fiduciary standards and the like

In the end, Finance, Procurement and or Internal Audit leadership know they should undertake this important risk reducing work. They also realize that an outside specialists provides valuable industry expertise. Yet, they often cannot get to “yes.”

Why the hesitation? The reasons are many; Marketing indicates that the timing is not right, we don’t have the budget, we’ve conducted internal reviews ourselves, our agency is a trusted partner, we’re considering transitioning agencies… and the list goes on.

The good news is that all rationale cited for not moving forward with comprehensive testing of  ad agency partner billings, costs and contract compliance can be readily addressed. The audit process is not time consuming, poses no relationship risk, is allowed for in the client-agency agreement, and most importantly the benefits far outweigh the cost / risk of the audit not proceeding.

Audit results yield a combination of historical financial recoveries tied to billing errors, unauthorized mark-up, unreconciled jobs, and outstanding credits.  Financial true-ups and learning far outpace the initial audit investment. And most importantly, the work yields forward looking process improvement, contract language improvement, financial refinement, and risk mitigation opportunities to generate cost savings and peace of mind.

With proper oversight, we have seen concerns regarding agency accountability replaced with a sense of trust and confidence. Key benefits in a market sector noted for its lack of transparency, murky supply-chains and lack of trust.

Where does your organization stand on this important accountability practice? Perhaps the words of Daniel Wagner, a widely published author on current affairs and risk management, can embolden organizations to take the prudent action:

“Some risks that are thought to be unknown, are not unknown. With some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed with the right set of tools, procedures, knowledge and insight, light can be shed on variables that lead to risk, allowing us to manage them.”