The risky business of media margins
This story was written for Media In Canada. Read the original article here.
Over a pint or two
Last Friday I was enjoying a post-work pint with a friend of mine, telling him about our successful home reno. About how happy I was that our contractor gave us a great discount on some of our materials. On the edge of bragging about the deal I’d got.
My friend, a contractor himself, was less impressed: “Well … you don’t actually know that. Sometimes the discount the warehouse gives them is much higher than what they give you. They might get 40% from the warehouse, and give you 15%.”
Hey! Now I felt cheated. Ezra never even mentioned the warehouse deal!
Maybe a different contractor would have given me a much better discount? Maybe I could have saved far more on construction materials?
But once again my buddy brought me down to earth. “At the end of the day, were you happy with the price and work?”
“Yes!”
“Ok then,” he replied, “Everyone wins!”
So we ordered some tapas. And afterwards, I thought: Does the same follow, with media?
Mark-ups, McKinsey and Madison Avenue
The media debate about mark-ups burns eternally. Last year McKinsey published a report on media rebates in advertising, including statements like:
“Many companies don’t have a clear view of where their dollars are going and what impact they are having. This lack of clarity means that a significant portion of media spend — in the form of fees or rebates — isn’t recouped by the marketer.”
Let’s not go crazy McKinsey — the marketer can’t recoup all in a markup-based agreement — the agency needs to be paid! But while the industry likes to navel-gazingly pretend the problem is unique to us, the fact is the question of middlemen, discounts and mark-up shows up across the board, in many industries [check out Michael Farmer’s Madison Avenue Manslaughter if you’d like to explore how we got here]. It’s a business problem, not an advertising problem.
Do we need to be transparent about mark-ups?
Let’s start with the fact that mark-ups and discounts of themselves aren’t a problem — everyone knows that people need to be paid, one way or another.
Then it must be the transparency, right?
Not so fast. Before we get to that, let’s explore what mark-ups are designed to do — allow media buyers (often outsourced agencies or tech companies) to operate profitability and be compensated for their effort.
Risky business
The challenge today is, as the media buying landscape has shifted towards digital, media mark-ups have become more than simple compensation.
The shift to digital has led to significant automation; media is often traded and placed without any human contact. Automated processes separate buyer from seller. Giving the industry scale and efficiency — that’s the plus side.
But! Automated processes introduce significant risk into the system. Risk of tech failure, human error, or both.
And who bears the risk of failure? The buyer? The seller?
Say you buy something from someone on Amazon and it arrives broken. How does or should Amazon handle it? What then?
By separating buyer from seller, we introduce the question of who handles the risk — a question that wasn’t as complex before. Back in the day, you would talk directly to the vendor who sold you the goods. Now, that’s not so easy.
The same applies to the media industry.
Who owns the risk management?
Publishers could and did take on the risk in a linear world; they were responsible for the placement. But in our multi-hand-off world that’s often not the case anymore, so we can no longer reasonably push that responsibility to them.
At the same time, we have introduced a brand-new slew of risk factors. Anything from technical failures to ad fraud and brand safety are everyday concerns that brands have when buying media online.
It’s true, Adtech giants do sometimes take on that risk. As they should. But the reality is that in the current climate big Adtech is enjoying an unprecedented monopoly (or more precisely a duopoly). With that comes the luxury of picking and choosing how much risk is passed up or down the chain, and who owns it.
Managing and mitigating risk now needs more defined ownership in the supply chain. After strategic advice and creativity,
managing risk is one of the most important value-adds a media buying partner can offer.
Why so focused on cost?
As the media buyers, the conversation we should be having with marketers about risk and results. Not cost and effort!
Is your buyer partner shifting the conversation to business results and the associated risks and guarantees? And if not, why not?
Back to my original story. It doesn’t actually matter how much discount I got on my materials, or even whether I got a ‘discount’ at all. Two things matter: Was I happy with the overall work? And was I happy with the overall price?
From a recent conversation with a new client:
“We had another agency pitch us. The guys were too cheap! They’d cut their margin in half to try and win the business. But what they failed to factor in is that lower margin leads to less effort on their part. Which jeopardizes my larger investment — the media placement. Maybe saving me a few dollars now, but risking way more down the line!”
Couldn’t have said it better myself.
And finally, back to bias
The root conversation on margin isn’t that margins and mark-ups have risen. I think the industry recognizes that in a new and fragmented media landscape, with a new set of rules, more effort is needed to impact consumer behaviour.
The real issue is bias. A mark-up system can influence people to choose certain channels or platforms that best compensate them — either consciously or unconsciously.
Say my contractor had recommended a low-quality product, the same one he recommends to everyone, only because of larger discounts. That would be a huge issue! An inherent bias that clearly works to my disadvantage.
Fast forward: the conversation of the future
I believe that when we talk about disclosing margins, the real goal is to uncover bias.
Marketers want to feel assured that their media buying partner isn’t recommending a channel/platform because there is more in it for them. Or not recommending a channel/platform because there is less in it for them. Marketers want and deserve better than that.
If we can work to eliminate bias from the supply chain, the margin-disclosure conversation becomes more fruitful. It moves into a more productive conversation about the level of risk and effort, who takes ownership, and how.
Essentially, it returns to the heart of the ideal business interaction I opened this piece with — where the client feels, with good reason, that they are happy with the price and the work. Everyone wins.
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Mo Dezyanian is president of Toronto media consulting group Empathy, and a professor at Centennial College’s School of Business.
