Media Management

Principal-based media: Is the juice worth the squeeze?

Infringed Terms

A study of 30 audits across UK, Germany and the USA found that 21 infringed some aspect of the agreed PM-related terms, including caps routinely exceeded, approval processes not applied and the relevant PM not being identified on plans.

While Artificial Intelligence commands the limelight this year (and will do for years to come) there are some other matters that should be attracting the attention of the Marketing Procurement community.

Perhaps the most immediate of these is ‘Principal-based’ media, also known as ‘Proprietary’, ‘Inventory’, or ‘Opt In’ media or even ‘value-based’ solutions. Let’s call it ‘PM’ for short.

PM is re-sold by the Media Agency to its clients at a discount against conventional media inventory and at a profit margin that advertisers cannot audit.

It is mixed in with conventional non-PM inventory to the extent that it is very hard to spot the join and only the media agency really knows whether the medium and its quality are what the advertiser would normally use and its true cost.

Where advertisers have allowed the use of PM, 80% of a schedule is typically non-PM at a normal price and fee and 20% is PM at a discounted media cost at an undisclosed profit margin for the agency.

The advertiser opts in to an agreement that prevents them from being able to audit the price the agency paid to the media owner versus the price the advertiser pays.

PM is only one of a multitude of non-transparent, undisclosed practices that Media Agencies have developed to increase their revenue, usually in ways that exploit gaps in their contract.

These have existed for several years but such practices that were identified and neutralised in industry contract templates have been replaced by new ones that often fall outside of the client/agency Master Services Agreement.

However, PM is actively positioned as being ‘transparently non-transparent’ in that the advertiser gets the advantage of the agency’s collective negotiation strength. The only apparent disadvantage is the inability of clients to know how much money their business is worth in total to their agency

The theory goes that the Media Agencies acquire media on their own behalf, thereby become the ‘principal’ to the media vendor/agency transaction and are therefore liable for payment of the media. The client receives exactly the media inventory they would have acquired anyway but at a lower price on the PM portion of their schedule, usually around 20%.

This is called ‘proprietary’ in markets outside of the USA where the Media Agency has generally always been the principal.

There is an obvious question: why can’t the Media Agency secure the better prices anyway without having to supposedly buy it for themselves, re-sell it to clients and be on the hook for payment?

In the US the way that this is answered is that the Media Agency is taking a ‘principal’ position and assuming the risk.

Outside of the US (where agencies are principals anyway) a different answer applies. The media is ‘proprietary’ to the agency and essentially pre-bought, so the Media Agency effectively owns the media.

This is the way that PM is presented to the market and some advertisers have accepted it. The recent ANA ‘Acceleration of Principal’ Media’ study showed that half of the advertisers questioned had recently used PM.

The ANA study naturally doesn’t take a position on whether the advantages outweigh the disadvantages, but the reality of how the PM system works on a day-to-day basis is somewhat different to how it is often portrayed and more nuanced that the ANA report could cover.

There are four main aspects to consider when weighing up the pros and cons:

• The ways that media planning may be affected
• How PM is negotiated by agencies and the extra contractual requirements for clients
• Potential audit and contract compliance anomalies
• The total value compared to the process

The ways that media planning may be affected

PM is one of many non-transparent revenue streams that agencies have created to increase what they call the ‘extraction rate’ of handling the client’s business. Many of these are baked into media planning in ways that will not be obvious to advertisers being asked to approve plans. Data and technology costs are another aspect.

These schemes have become more important to the Holding Companies as other revenues have come under pressure. Their media buying groups are critical to their financial performance.

There is an inherent potential conflict of interest in media agencies being both buyers for and sellers to a client. If PM provides an additional margin for the agency it goes without saying that they are likely to promote it.

In fact, the client-facing media agencies are required to offer PM to their clients and are rewarded for doing so. The agency groups do not have PM deals in every medium and with every media owner so inevitably they will promote PM where they do. The likelihood is that smaller or more niche media owners are obliged to offer PM and these may feature on plans more than they should.

If a media owner agrees to sell on a PM basis, this will only apply to a portion of the spend, typically 20% of spend in a medium or a media owner. This will not apply to all media nor all media owners.

But advertisers will still spend 80% of their budget on that medium or that media owner at a conventional discount. So the risk is that an inappropriate medium or vehicle is being used for a cheaper price on a maximum of 20% of the total budget for that medium or media owner.

At a minimum the media agencies should provide a rationale for using PM and are supposed to identify clearly on plans where PM is being recommended by medium and media owner and why. In reality this often doesn’t happen and plans may simply state that some element of PM may be used in the execution.

This sometimes occurs because the use of PM has not been finalised and extra planning is required.

In this case some groups do not initially include PM on media plans but post-approval they ask their specialist PM units to fulfil some of the plan, supposedly to avoid accusations of impartiality.

This therefore requires a second round of planning that reflects the influence of PM where its presence should be clearly denoted and a second and final approval secured by the relevant signatory.

So media planning where PM is being used is a more complex process than usual and requires a higher degree of caution. It also has contractual implications.

How PM is negotiated by agencies and the extra contractual requirements for clients

The media agency groups usually report that PM is negotiated by a specialist unit. This is a related party within the group with which clients will have no direct relationship. They effectively act as a wholesaler of media but have no sight of any advertiser’s individual specific requirements.

It is important that the advertiser/agency contract has ‘belt and braces’ clauses that cover the role of all agency-related parties, many of whom play a key role on your business but are behind the scenes.

Even though the reality often is that PM has not actually been pre-bought or paid for (and is therefore not actually ‘proprietary’) the agency groups are working towards targets that trigger benefits to them.

It is also often the case that the PM is simply negotiated alongside non-PM as part of a media agency group deal without the involvement of a specialist unit.

There is often no meaningful difference between PM and non-PM at a negotiation level.

However, if advertisers decide to allow PM, they will need additional clauses in their contract which need to be negotiated, including:

• The need for a rationale for using PM by medium/vehicle
• The percentage of budget allowed for PM (the ‘cap)
• Clear identification of PM on plans
• A specific approval process, including designated signatories
• Separated post-campaign reporting, including performance audit
• Remedies for non-compliance of PM terms
• The ‘Opt in’ agreement
• Agreement on the handling of data when buying PM

Normally additional day-to-day governance protocols are also required.

Clearly none of the above is needed if advertisers choose not to use PM but it is needed where only some of the client’s media inventory is going to include PM. In practice these clauses need to be inserted if there is a possibility of PM being used; it is unusual for contracts to not need these clauses.

In reality it can take some time and effort to conclude these additional clauses, often under time pressure, yet they only apply to some media not others and not to 100% of the budget in any medium nor in all media.

It’s a lot of extra work for the minority of the budget.

Potential audit and contract compliance anomalies

Even if these clauses are agreed, it cannot be assumed that all of the terms agreed will be adhered to.

While the ‘opt in’ agreement prevents the advertiser from seeing the ‘wholesale’ price and therefore the agency margin, it is important to verify that the specific PM terms have been delivered against.

Media Marketing Compliance (MMC), the global contract compliance specialist auditor, carried out a study of 30 audits across UK, Germany and the USA and found that 21 infringed some aspect of the agreed PM-related terms, including caps routinely exceeded, approval processes not applied and the relevant PM not being identified on plans.

These are often part of a number of other contractual anomalies.

The contract compliance audit process is often conducted some time after the event and infringements are identified long after they have happened. This is too late to rectify and may lead to the application of contractual remedies if such are included in the agreement.

Contract compliance verification increasingly needs to be brought forward to become more real-time and especially in relation to the use of PM. MMC have developed a process for doing this to alert advertisers to breaches much earlier in the process.

It is generally assumed that the quality of the PM inventory is no worse than non-PM and this is a core part of the rationale.

This may or may not be the case and it is hard to know what would have happened without PM being present.

This is theoretically covered by the performance audit process but it should not be assumed that the post-campaign schedules submitted to performance media auditors clearly and accurately list the PM inventory versus non-PM. This can by accident or design.

The performance auditors measure what they are sent, not whether it is in line with contract.

In practice it is not easy to assess the quality of the inventory thus bought nor the difference in price between the two kinds of media inventory.

It also cannot be taken for granted that PM is excluded from cost guarantees post-pitch, especially in multi-country set-ups. This needs to be contractually binding and subject to audit.

The total value compared to the process

So, is the juice worth the squeeze?

Typically 20% of a budget is allocated to PM and this achieves a maximum of 10% extra discount, according to reliable industry estimates.

So the net benefit across the whole budget is 2%. This is possibly significant for a large budget but may not be for most advertisers. Given the additional time and effort required to fulfil the PM process, this is a relatively low return.

However, this only applies to some media, not others, and some media owners. In reality, the 2% improvement, if it even accrues, may only apply to a minority of a total budget.

In some cases the use of PM means that other contractual benefits do not apply, such as cash rebates in some media in some markets, so there may be no net benefit at all.

And with contract compliance often missed, the process does not always work as planned.

Some advertisers like PM as it changes the definition of ‘working’ versus ‘non-working’ money as the agency income is wrapped up in the cost of media. This can be seductive but is not a saving overall and there is only a modest reduction in ‘non-working’.

While PM is often described as a benefit to advertisers, it does entail a different planning, buying and contractual process that can be time-consuming and where the margin that the agency is making is unknown.

The advertiser is thus unable to know the full value derived by the agency group from their business and the comparison with their own benefit.

The advantage of a possible 2% extra media value in some media or some media owners set against all of the extra time and effort involved to protect all media spend is almost certainly low compared to the benefits enjoyed by the agency groups. But these can never be known.

So PM is not a straightforward win-win and requires a high degree of time, effort and care which may outweigh its apparent advantages.

About the author.

Nick Manning is a Media Agency co-founder, ex-agency CEO, Founder at Encyclomedia International, Non-Exec Chairman of Media Marketing Compliance (MMC), Adtech advisor, commentator, investor and writer.