Media agency business Models
While the statement that the industry is on the “cusp of a meltdown” is melodramatic, the current media agency remuneration model is unsustainable. But many in the industry have known this for a number of years.
It is interesting that in the, Simon Rutherford lay the responsibility with the media agency management and their “greed and egos”, but it is the buyers of these services, the marketers, that are equally to blame.
Demands for lower cost from media agencies, driven by procurement, has seen media agency fees drop globally to an average of around 3% of media spend according to the World Federation of Advertisers (WFA) in 2011. The downward market pressure has achieved the result desired by marketers, but at what cost?
The current situation is predictable as in the face of falling revenue and profit, it is natural for agencies, like all companies to look for new or additional sources of revenue. Here enters the media owners, the third party in this relationship and one who have always been a key player in the relationship.
While media owners play both the marketer and the agencies equally, it should not be forgotten that the media agency was originally a construct of the media owners. Rather than dealing with thousands of advertisers, it was certainly easier forging relationships with a smaller number of “agents” in relationship terms dictated by the accreditation system that ensured the media owners where paid.
Today we have the marketers offering 3% of their total media spend as “compensation” for the agencies’ services, while in many cases the media owner has budgeted 20% or even as high as 30% of the media spend as a sales “incentive”.
In the past this was the 10% – 20% declared commissions, depending on the market and media category and the additional added value. Today this is now euphemistically called “non-media income” and can include anything from commitments for no-cost media inventory to payments for “services”.
Many but in most cases these arrangements are almost impossible to detect and the audit process will almost certainly drive the process further underground.
The warning bells were sounded in 2010 when the with a strong emphasis on transparency. It was reinforced locally last year when that the media agencies locally, through the Media Federation of Australia (MFA) were resisting the Australian Association of National Advertisers (AANA) introducing the same charter locally.
Three months later the issue was “broadened” to encompass more agency sectors, as, and disappeared until now. But none of the other agency sectors manage the same significant level of investment on behalf of a client with a third party like media. Creative, digital, public relations, sales promotions, events, experiential will be investing typically less than half of their revenue with third parties. But media agencies manage 97% of significantly larger total media spends with third parties whose business model has allowances for significant costs of sales.