Opt-ins: a New low for the Advertising Industry
By Guillermo Girola When you thought that the advertising profession could not get any lower, then came the opt-in media buys. Wait, something is wrong with the headline and the first line. Maybe you misread it. What could it be…? I know! You thought we were speaking figuratively! Sorry for that. We get that a …
By Guillermo Girola
When you thought that the advertising profession could not get any lower, then came the opt-in media buys.
Wait, something is wrong with the headline and the first line. Maybe you misread it. What could it be…? I know! You thought we were speaking figuratively! Sorry for that. We get that a lot, we auditors are so bad at poetic writing… Let us put it straightforward.
If you decided to use opt-ins because you received a very convenient, hard-to-resist low pricing, that price should -from now on- be set as the new baseline to evaluate the agency’s performance in media cost containment.
Let this idea sink-in understanding how opt-ins work, what market dynamics are at play and how you, the advertiser, can come out with a long-term benefit from these transactions.
How do Opt-In transactions work?
When your agency approaches you with a proposal for you to ‘Opt-In’, what this means is that you agree to purchase some media inventory that the agency purchased on its own and is now offering it to you at a different (lower) pricing level than regular buys. This is also known as media purchases made with the agency acting as principal in the transaction, as opposed to acting on your behalf as an agent.
These types of offers are usually attractive because the cost tends to be significantly lower than what you get for the same type of media. For this to happen, the agency needs to have had the ability to obtain that inventory at a lower cost, so that it can sell it to you at a discount. The big question is: if the agency was able to get such advantageous conditions, why didn’t you get a similar chance. Pull from that thread and you will start seeing behind the curtains of the agency-media vendors relationship.
Market Dynamics at play
In a nutshell: media vendors are concerned that you, the advertiser, exert significant pressure to lower the cost of media. The agencies, at the same time have significant pressure to keep their profitability at historical levels. The risk of these concurrent needs is that media vendors could be ceding some value from their inventory to the agencies for them to sell at higher margin, as long as the agency keeps bringing their advertisers to the table to pay ‘regular’ price. In this hypothesis the agency retains the full margin as profit and the media vendor would have in the agency an ally to keep downward pricing pressure at reasonable levels. That would be a win-win, for the media vendor and the agency. We are not saying that this happens, but we see the risk and hope you do too.
The agencies may say in some cases that they are assuming the risk of advanced payment and that’s the reason why they get the deep discounts. While that may be the case, not all agency networks do in fact pay in advance. And the risk is really low. Or do you think the media vendor will make the agency “eat up” any inventory paid for and not used? Not likely, right?
Also… if the agency obtained the deep discount in a bona-fide negotiation and assumed the risk and everything is crystal-clear, why not revealing the full nature of the value chain?
Also… Why don’t you have at least the same chance as the agency does to obtain a similar deal? Did anyone ask you if you could get the same price by paying in advance?
And finally, let’s assume and extreme scenario: the media vendor will only be able to deliver on one of two purchases, one is your regular buy and the other one is your agency as principal buy. Which one will the agency prioritize when negotiating the fulfillment by the vendor? Even if there is no shady negotiation behind, do you see the conflict of interest?
In any case, the bottom line of this market dynamic is that there is value already ceded by the media vendors. But instead of flowing all the way to the advertiser, the ceded value is kept by the agency as a source of profit. Put a pin on that thought.
How can you, the advertiser, benefit in the long run
The short-term benefit of an opt-in buy is clear: you get a deep discount for some media space. You really don’t not want to turn away from that. So, the conundrum is how to get the short term benefit without being an enabler of a system that is less-than-transparent.
The answer is: push to make the new low price be the new baseline for your year-on-year cost containment goals for the agency.
Your argument is: if the agency got for you a special pricing for the opt-in buy, there is no reason for you not to get the same pricing conditions for all purchases for that particular media vendor.
Remember that thought about value transfer we asked you to pin above? Go bring it back. In our previous hypothesis, the media vendor is willing to deep-discount some buys. But there is a condition: ‘regular’ buys can’t fall below certain pricing levels and/or volumes. Otherwise, the trade-off does not work.
Here comes your strategic move: if you set the new low pricing as the new reference point, you are demanding that the value cession that the media vendor made in favor of the agency is from now on fully transferred to you and for your entire purchase.
This has two likely outcomes. A) the equation would no longer work for the media vendor. This should cause it to stop happily ceding so much value to the agency for those special buys. B) The agency would not meet the media cost containment goals and you will retain some (or all) variable compensation. You retain part of the value.
In the mid- to long-term, the effect of this strategy is that you get in the way of the mentioned win-win deal between the agency and media vendors where the losing party are the advertisers. It makes non-transparent deals less valuable for at least one of the parties involved. And in the end the market returns to a more natural dynamic where payers and receivers are the only ones able to make decisions on the margins of a transaction, and intermediaries are paid for facilitating the transaction and/or actually adding value.
There are a few conditions for this to happen:
- You need to be ready to negotiate hard,
- Your contracts must be ready to support you, with clear transparency clauses, full audit rights for every purchase and strong advertiser rights protections,
- You need to be ready to dig deep into your media numbers and ask all the tough questions.
The advertising industry is not at its peak in reputation. But if they go low with their opt-ins, you can still come on top. Or something like that. As said, we auditors are the worst at poetic writing.