An Issue in TWO PARTS….
Part 1: BACKGROUND ON OPT-IN MEDIA BUYS:
Agencies have been placed under tremendous pressure by continual reductions to agency fees and commissions, increased payment terms, and a rise in operational complexity due to digital media. Not surprisingly, they have had to become very creative in developing alternative revenue models, many of which have led us down the path of eroding trust between advertisers and agencies.
Originally, agencies resorted to simple rebates from media vendors based on the overall volume they traded with them on a yearly basis. These were commonly referred to as AVBs (Agency Volume Bonuses), rebates, rappels, sur-commissions, etc. Agency contracts were cleverly crafted so that the client would be entitled to any discounts, bonuses or other benefits based on the client’s investment only. This sounded like sound language but allowed agencies to keep anything that was derived on “overall” agency volume. Many advertisers have closed this loophole, but others have appeared. The cat and mouse game continued.
Trying to find other sources of revenue, agencies began selling services to media vendors. This came with two problems. First, there could be potential conflicts of interest since the media were now vendors and customers at the same time. Secondly, there has been a concern that many of these services were sold at a “premium”. Essentially, for much more than they were worth, allowing the agency a backdoor to get rebates in another form. Again, language was added to agency contracts to limit this as much as possible.
Starting with programmatic media, agencies began making large scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model. By doing so, advertisers allow the agency to buy as principal and waive audit rights, thus preventing them from seeing what is being paid to media vendors and allowing the agency to make an unknow margin on these transactions.
Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions provided they get approval from their client.
Initially, opt-in transactions were truly “opt-in” — meaning the advertiser could decide to participate or not.
Trying to find other sources of revenue, agencies began selling services to media vendors. This came with two problems. First, there could be potential conflicts of interest since the media were now vendors and customers at the same time. Secondly, there has been a concern that many of these services were sold at a “premium” — for much more than they were worth. This provided the agency with a backdoor to rebates in another form. Again, language was added to agency contracts to limit this as much as possible.
Starting with programmatic media, agencies began making large-scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model. By doing so, advertisers waive audit rights and allow the agency to buy as principal. This prevents advertisers from seeing what is paid to media vendors, and it allows the agency to make an undisclosed margin on these transactions. Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions– provided they get approval from their client.
Initially, opt-in transactions were “opt-in.” The advertiser could decide to participate or not. As long as the client went into these transactions understanding the consequences, they were entering into this at their own peril. The issues with these transactions are obvious: (1) The agency was now an advisor and a vendor at the same time, creating potential conflicts of interest. The advertiser could no longer trust that recommendations were in their best interest or instead to the benefit of the agency; (2) There now was potential for the agency to “comingle” their regular buys executed as “agent for a disclosed principal” (disclosed pass-through pricing) with their “principal” transactions designed to drive gains for the agency. This could result in a situation where the “agent” buys are at acceptable price levels while the “principal” buys receive significant discounts.
This allows the agency to make a higher profit at the expense of the regular buys performed as “agent.”
As advertisers put their media agency accounts into review and agencies continue to promise huge savings, the delivery of these savings is now often contingent upon the use of opt-in buys. In short, some agencies are requiring advertisers to agree to opt-in transactions upfront– as long as the agency is providing “equivalent” media as would have been purchased normally and offer a certain level of savings. Once this is agreed upfront in the contract, the advertiser is no longer in control of when opt-in buys are done and what gets purchased specifically. In other words, the agency is in full control of what gets purchased, how it gets purchased and how much margin they make.
So, this is where we are today. Advertisers are truly between a rock and a hard-place when they decide whether to opt-in or not. If they don’t opt-in, they may forgo value in the short-term by not taking the “discounts” offered. If they do opt-in, they are encouraging the expansion of this practice, with all consequences involved. Either way, value that should have gone straight to the advertiser in the old days now stays at the agency. Media vendors don’t care which pocket they get paid from as long as they make their numbers.
No wonder trust has been eroded.
