February 08, 2017 | Marketing
It hasn’t been long since an investigation by the Association of National Advertisers (ANA) uncovered hidden practices within the advertising agency world. On the surface, some of these practices may seem commonplace and harmless, but a little observation reveals they conflict with the basic tenets of business – trust and transparency.
What are some of these malpractices?
Let’s take a closer look.
Rebates are simply kickbacks awarded by media suppliers to the “agency of record” to win and keep agency business. The following diagram shows how the rebate structure works.
A rebate can be in the form of cash only (as shown in diagram), which generally happens when a certain volume of ad spend is reached. However, there are other “rebate payment structures” wherein the rebate is simply hidden through engagement of another entity (often a subsidiary of the agency). The funds are shown under the title of “service agreement,” in which the vendor is billed for services like “planning” or “media co-ordination.”
Agencies purchase media in large volumes in advance to secure substantial discounts. The media is then resold to advertisers with undisclosed markups, which greatly improves agency margins without transferring the benefits to the advertisers.
Agencies utilize yet another mode to capture additional margins from advertisers by channeling ad spends to their business units involved in media/technology, owned by the respective holding companies.
These revelations of non-transparent practices have placed a huge question in the minds of CMOs and marketing procurement departments alike – is it safe to trust the agencies they engage with on an ongoing basis?
Aiming to increase transparency, the ANA has issued a set of new guidelines to aid CMOs and marketing procurement professionals when engaging with a media buying agency:
Moving forward, marketing procurement needs to make sure that the above stated guidelines are followed, and ensure transparency and disclosure are part of the deal when working with agencies. Lack of transparency would not only result in additional costs being shifted to the advertisers, but will also undermine trust between agencies and the advertisers.