FIFTY WAYS TO READ YOUR REBATE
It always seemed like an urban myth – this idea that Eskimos might have 50 words to describe snow. Thankfully, the Washington Post has validated that it was in fact true – so now we know.
It always seemed like an urban myth – the idea that in the world’s most sophisticated market, the US, that media agencies would be hiding rebates and discounts. From the ANA report released last week, the evidence would seem to suggest that this is the case.
For those of you hiding in a non-marketing cave, or away on a Game of Thrones binge, the big story was the release of the eight-months-in-the-making report from the ANA (Association of National Advertisers) in the US that, based on 143 interviews across all players, media agencies and their holding groups are consistently engaging in ‘non-transparent’ activities. The ANA took this so seriously, they hired a firm called K2 (no relation to R3), led by a series of ex-FBI investigators, to conduct the work.
The agencies have been the most vocal in demonstrating that the results are not quantified, the sources are all anonymous and the conclusions are inconclusive. But when you read the whole thing, you are left with one overall impression.
Agencies have fifty words for rebates.
Once upon a time, this was a simple industry. If a company paid $100 for media, agencies were entitled to a 15% “commission.” Hence, on behalf of the marketer, it would act as its ‘agent’ to produce advertising and manage the whole process. Ironically, we lived in these simple times not realizing this was in fact a ‘rebate’ from the media from the beginning. Creative and media unbundled, media owners got squeezed for revenue, programmatic, barter, DSPs, Digital, Social and more all emerged, and here we are now in this mulligatawny soup of a situation.
So what IS a rebate?
Is it a cash rebate? This was the most common term mentioned in the ANA report – that in exchange for investment in a media channel, that vehicle will offer a percent back to the agency in cash. The study found 38 separate incidents of this, ranging from 1.67% to 20%. Ironically, several study sources suggested this money goes back to clients – all this in a market where, before 06.06.16, the industry insisted there was, in fact, no such thing as rebates.
Is it free media? Every good media agency negotiator will push owners hard to optimize added value. The ANA’s study identified that the issues with this is that some agencies were retaining these hard earned negotiations internally, or sometimes given the flexibility to use it for any client. Dear agency, the only reason you are getting this free media is because a client gave you their money.
Is it research? Or consulting? It seems logical, right? Media owner wants to improve their service offering. Agency offers to provide research or consulting support to do that. The report was quite specific on this factor – “This related to work that was of minimal utility, significantly overpriced – or not provided at all.” In short – a rebate.
Is it a referral fee? More common amongst ad tech, agencies have set up referral fee agreements, paid at the end of each year – many as high as 10% of media spend. You might be best to call this a rebate.
Is it unbilled media? Mistakes happen through the course of a complicated media campaign. Occasionally media forget to invoice agencies, but regardless, clients pay for that media. An agency will often keep those funds in escrow for a while, until eventually moving it into the bottom line.
Is it from an Agency as Principal? At the ANA conference in Boca Raton last month, Michael Roth (left), the CEO of Interpublic Group, made it clear that his group “will only ever act as an agent, and not as a principal” meaning they wouldn’t buy their own inventory and then resell it. This report made it clear this approach is happening in the US – and it
Is it already well-established “business as usual.” In markets like Japan and Korea markups were reported to range “from 30% to 90%.” But in the US….in what we thought was the most transparent market on earth?
HOW SHOULD MARKETERS RESPOND?
We’ve spent a lot of time in this article on the ‘rebate’ part and not much on the “read” – and this is where the fundamental disconnect is. My friend and idol, Brian Weiser of Pivotal Consulting, the “Nate Silver of Marketing,” gave truly the best quote of the week’s news cycle – “A Prince Who Is Not Himself Wise Cannot Wisely Be Advised,” said Machiavelli many years ago.
As marketers’ jobs have become more complicated, it has been difficult for many of them to know as much as they would like about the ecosystem they participate in, especially in the important fields of media planning and buying. This has to change quickly – or else CMOs can no longer look their CFOs and CEOs in the eye and tell them that all of their money has been invested wisely.
Here’s what we would recommend…..
Change Contracts Immediately. Marketers will have no legal standing in this debate, unless the wording in their contracts with their agencies protects them from these kinds of issues. Most don’t.
Report Rebates Regularly. Rebates are not going away, but the best agencies are pro-actively reporting these on a quarterly basis to their clients, so that media channel decisions can be mutually made on what will most effectively reach the consumer.
Audit Agencies Annually. A simple onsite financial audit by a third e party is crucial to make sure agencies are accountable and fulfilling their legal commitments. It makes no sense for one company to give another $10m, $50m or $100m and not expect some independent oversight on how it was invested.
HOW SHOULD AGENCIES RESPOND?
Perhaps the most damning part of the report is what is not in it. 138 of the 281 requests for interviews by the ANA were rejected. Five of the six agency holding groups refused to speak to the investigative agency leading the study. All of them have since come out to criticize the report – a report that they actively played no role in shaping.
Despite this, the study covers in great detail 59 individual examples, backed up by written documentation, of “non-transparent” business practices. I am reminded now of Melancholia, a very weird movie from Danish director, Lars Von Trier. The plot revolves around life on earth, as a large planet from another galaxy speeds towards a head on collision with us. Kirsten Dunst stars with other European actors, choosing to enjoy a huge party to celebrate their last days.
The world blows up.
Greg Paull is principal of R3 an independent consulting firm focused on improving the effectiveness and efficiencies of marketers and their agencies.