Advertisers are pushing the limits of how they make money from agencies

Agencies get a bad rap for the shifty ways they make money from media trading, but advertisers have been doing the same for years.

Disney’s pitch pushed the issue into the spotlight last week after it reportedly said it wants its chosen agency to spend more of its clients’ money on Disney’s titles. Effectively, the business is trying to cut its direct fee to the agency by sharing more rebates. Demands like this aren’t new. Media owners have implicitly insisted that any agency hire is beholden to a commitment to spend for years. But Disney’s demands are actually baked into contracts, as are those made by more advertisers now, said four advertising execs interviewed for this article.

“We worked on a pitch for two large global banks and in both scenarios, the client acknowledged that the two leading agencies banked with their company,” said a pitch consultant on the condition of anonymity. “One bank made the implicit suggestion that the nature of the relationship could change if the agency relationship changed.”

These deals were tolerated to a degree because they weren’t a blatant attempt to distort investment decisions. It was implied instead. The bank in this instance knew its agency was able to earn additional income from media trading including data and tech mark-ups and wanted to share in the processes. All parties involved understood the terms of engagement. It takes a smart client to manage this balance, and if it means that they pay less direct fees to the agency, it’s an additional benefit, said Nick Manning, founder of media consulting firm Encyclomedia.

“Advertisers know that there are many ways that media agencies can earn additional income from media trading, including data and tech mark-ups,” said Manning. “So advertisers want to know how they can benefit from these, sometimes on a shared basis.”

The problem is there are many instances where advertisers aren’t smart enough to exploit the grey areas of media trading.

“According to reports, Disney is saying to your agency ‘I want you to spend money from other clients on me.’ If you say it out loud it’s crazy as you would basically compromise your advice to other clients,” said Eric Snelleman, managing partner at consultancy Uncommon People.

Defunct travel company Thomas Cook would ask agencies to openly write a check to win the business as part of their pitch process six years ago, said two agency execs that contested those accounts. GlaxoSmithKline, as part of its pitch last year, took agencies into rooms at a rugby stadium in London and auctioned off the account. Microsoft had a deal with Publicis in which it had the first and last opportunity to win business from the holding group’s clients. There was even an internal process in place where the agency would provide a clear rationale as to why the software giant did not win a bit of business. It was a weekly meet, said one media exec who worked at the agency at the time.

We’ve reached out to Publicis and will update the article when it responds.

The reality is the advertiser rarely wins here. Doing any of the above demonstrates a lack of understanding of media. The agencies often have ways of dealing with it. In the case of Disney’s pitch, it’s likely the agencies involved anticipated it would get dicey at some point. Businesses going through mergers and acquisitions at a scale like Disney tend to treat media pitches like a commercial exercise. “Clients see a big number on the table like media spend and try to figure out how to get some additional savings from that money,” said the pitch consultant. Agencies have been happy to accept the demands from the likes of Disney if it wins the business and provides an additional margin.

“If their media agency is able to generate additional benefits, there is no reason why advertisers should not take advantage as long as the media trading incentives do not distort planning choices,” said Manning. “Agencies have been doing this for years, and the only real difference is the clients now know about it. At least it’s out in the open.”

But by accepting unreasonable terms from advertisers, agencies are contributing to their own undoing. If they say no advertisers will give the account to another agency. But if they say yes, the agency is under pressure to fulfil those terms and thus the race to the bottom continues. Advertisers may be getting smarter at finding the grey profit areas in media trading, but they’ve a way to go before they can catch up with the agencies who have been squeezing advertisers for decades.

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