A few months back in May this year McKinsey & Company published a report about media rebates within advertising.
The paper was informed by more than 100 engagements with marketing organisations over the past two years, as well as a series of interviews with industry executives, including many CEO’s at global advertisers.
The article’s focus was on how advertisers can build more transparent relationships with their media agencies.
Specifically, it delved into how difficult it is for marketers to find funds to fuel growth when they’re not clear on how their media dollars are spent.
To quote the article: "This is because 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."
It went on to cite concerns that large advertisers have about media agency transparency – or lack thereof.
And media rebates are their key area of concern.
"Agencies often don’t disclose or pass along to their clients rebates (also known as agency volume bonuses, or AVBs) they receive from media companies," the report said.
Rebates to media agencies vary according to the medium. According to McKinsey rebates are lowest for traditional media such as television and radio which can attract rebates of 5% of total spend. Rebates for out of home media are typically larger, as much as 15%. In digital media rebates are the largest, estimated at 20-35%.
McKinsey also refers to a 2016 study sponsored by the Association of National Advertisers (ANA). This study suggested that media companies commonly pay cash rebates or offer free inventory to media agencies in return for volume buys, but media agencies typically don’t pass along these rebates to their clients.
As a sign of the unease advertisers have been feeling about rebates, since 2015 more than 500 advertisers have issued RFPs for media agencies, including some of the largest U.S advertisers.
And many marketers in Australia are feeling the same way.
So how do marketers get a fix on what they’re actually paying their media agency?
Most media agencies will pitch for business on the basis a ‘transparent’ media commission will provide their income. This commission can range from 4% to 10%, and sometimes lower or higher, depending on the level of media billings, how tough negotiations are, and how much a media agency wants that particular piece of business. Once agreed that’s what marketers believe they are paying the media agency.
But it’s well known in the industry that other, less transparent, commissions can apply.
I have it on good authority that many media agencies derive income from additional sources such as rebates that go directly from the media company to the media agency or in some cases to agency group holding companies.
These hidden commissions can range from 5% right up to +20%.
So, while a marketer might think they’re paying 8% commission they might actually be paying over 20%.
What this means is that their media budget is simply buying them less.
Instead of their $100 media budget buying them $92 worth of media after 8% commission the hidden commission has the marketer actually only receiving $80 worth of media.
I’ve actually sighted a media agency prop to a media company that dictates that 20% of the spend must be delivered to the media shop’s holding company trading arm. And this is in addition to the transparent commission.
This is a very significant problem for marketers and the media agency business.
Marketers don’t know what they’re paying because often the real media commission rate is opaque.
And in many cases marketers may have unwittingly agreed to this in their media agency agreement. Here are two examples of the types of clauses that typically get included in agreements with media agencies.
Example 1:
The Agency reserves the right to retain any commissions, rebates, allowances, credits, discounts or any other benefits allowed to the Agency by any Media Vendor, or other third- party supplier, including any relating to prompt payment of media accounts or the Agency’s volume with a particular Media Vendor.
This wording leaves the door wide open for any kind or level of media vendor kick back.
Example 2:
The Agency will pass on to the Client the benefit of any commissions, rebates, allowances, credits or discounts allowed to the Agency by any Media Vendor or other third-party supplier for expenditure incurred on behalf of the Client in providing the Services,excluding any incentives achieved in relation to the Agency’s total volume with a particular Media Vendor or other third party supplier.
The wording of this clause starts by suggesting that commissions, rebates, allowances, credits or discounts are passed on to the client. But it then adds a crucial sentence about excluding any ‘volume incentives’. Crucially, it refers to these incentives being in relation to the agency’s total volume which makes it impossible for the marketer to know what their portion of the agency’s total volume contributed to this rebate and exactly what they should be entitled to.
This system of opaque media commissions, rebates, allowances and incentives is so carefully managed by the media agencies that many marketers, and even the most sophisticated ones, are quite unaware of the real cost of their media.
Additionally, one must question the neutrality of media recommendations. Are they the best medium for the task or are they simply the channel that delivers a higher hidden fee or rebate for the media agency?
This should be ringing alarm bells for all marketers.
But what can they do about it?
With this additional media agency income so well hidden in plain sight it’s going to be very difficult for marketers to gain visibility on these hidden fees.
So, I have a suggestion for any marketer who is questioning their media costs.
Write to your media agency ask them to clearly identify all commissions, fees, rebates, volume discounts and any income they, or their holding company, generates from their media spend.
Ask that the media agency CFO signs a pre-prepared Affidavit or Statutory Declaration that categorically states that the transparent media commission (ie. the commission stated in the contract or agreement) on their business is the only income that the media agency receives – either directly against their media spend or indirectly in a ‘pool’ the media agency invests on their clients’ behalf.
And if there is any pushback or hesitation then get suspicious.
Apart from the fact that hidden commissions could be considered illegal this cover up of these fees could be costing your organisation a lot of money.
It is time for media agency fees to be truly transparent.
And it’s up to marketers to do something about it.
BCM managing director Paul Cornwell