Transparency shift: CMOs navigate new norms in agency profit models

“As far as cost, I am OK with my agency adding their margin if they are doing all the heavy lifting and proving their ROI,” said Raj Nijjer, head of marketing at growth platform Edge. “As media buying becomes commoditized and channels are increasingly fragmented, I expect my agency to offer the service so I don’t need to spend on a full-time staff cost.”

Before delving deeper, let’s clarify principal-based trading, as explained by independent media analyst Brian Wieser. In this model, agencies use various methods to increase effectiveness and profit. They might act as resellers, operate ad networks, manage services directly with clients, engage in cost-focused arbitrage, participate in asset trades or produce content, all to maximize revenue while catering to client needs in a complex media landscape.

That isn’t so bad right? Well, it’s not if marketers work with media agencies with their eyes open. And they can do this by making sure that agencies operate within specific guidelines, such as investment caps, quality assurances, strategic alignment and, where possible, audit rates. These safeguards are essential to prevent negative outcomes from principal-based trading, allowing marketers to maintain control and ensure their interests are protected in agency partnerships.

“Brands today have deeper media, procurement, trading and technical expertise that they are better placed to navigate this than before,” said Ryan Kangisser, managing partner of strategy at media advisory firm Mediasense. “So I’m not so sure this is about a lack of knowledge about principal media, more a difference between those who do, and those who don’t — largely out of choice.”

He has a point. The fact that agencies profit from the media they buy for advertisers isn’t exactly news. It echoes the big stir caused by the 2016 ANA report, which blew the lid off issues like media transparency and rebates. That report really got CMOs fired up, pushing them to double check their agency’s actions for any sketchy behavior. These days, though, the focus has shifted toward keeping those practices in check and making sure everything’s above board. Really, marketers just want to know that the inventory they’re being guided to by their media agency is best for them, not the agency.

“Evolved principal media arrangements can provide cost efficiencies that benefit clients or be reinvested into enhanced services,” said Matt Wurst, a fractional CMO for Genuin. “There is also a risk that they merely contribute to greater profits for the agency’s shareholders. Agencies must ensure that any principal media deals truly do pass along advantages to the client in terms of better pricing, inventory access or performance.”

If agencies can’t do this, then that’s when principal-based trading can end up on a slippery slope to malfeasance — something the holding group bosses seem increasingly aware of as this sort of trading continues to be a big driver of their businesses.

“Havas’ principal-based buying solution, HVP, was created to differentiate itself from other agency holding company offerings in a few key ways — transparency, media quality and flexibility,” said Greg James, CEO of Havas Media Network North America. “We see overall a net-positive impact from this position in certain situations — always with transparent discussion with clients, procurement and legal, and always with true flexibility.”

Getting a fix on what that net-positive impact of this sort of trading has been on the agency business is tricky.

Some agencies report costs directly passed through from media buys, while others might include service fees or other types of revenue in their reports. And even these figures might not give the full picture, especially since agencies might mix higher-margin principal trades with lower-margin services. What’s more, if any best efforts options are used, these might not even show up in the financial statements that agency holding companies release. In short, it’s quite the minefield.

Still, it’s safe to assume that principal-based trading will continue to be a big driver of growth for the agency groups, albeit not a dominant one — yet. Marketers, often sticking to their usual habits, usually opt for trading models that bundle services and media, prioritizing cost over value. This inclination naturally supports the ongoing role of principal-based trading in the industry.

And therein lies the real kicker. It was marketers’ penchant for driving down costs at every turn with the holding groups that first made agency bosses get creative about how they made up the shortfall. As a result, it’s on marketers to help make sure this practice is done in a controlled, orderly fashion.

Bill Duggan, executive vp at the ANA, who oversaw the report’s creation, acknowledges that agencies need to find other ways to generate revenue, given downward pressures on them from clients.

“I think clients bear some of this responsibility because there’s just been a long-term squeeze on agency compensation,” he said. “While I understand why clients are trying to cut compensation or want extended payment terms or wanting cheaper [inventory], something’s got to give.”

But Duggan also cautioned marketers to pay more attention to the paperwork of their arrangements with media agencies — and the report clearly points to Publicis and Omnicom as the main purveyors of principal-based trading. To Duggan, the priority for more marketers is to make sure they educate themselves on the practice.

Yes, there are many marketers who have already done this, but there are many others who haven’t. It’s those in the latter group who need to be wary because there are real risks to principal-based trading when it’s not understood.

Nick Manning, who owns mentoring business Encyclomedia, which advises companies in the media and advertising industry and is a veteran of Ebiquity, has seen a lot of bad behavior from media agencies over the course of his career. Manning lambasted the practice in a column written for The Media Leader on Tuesday morning: “It enables agencies to low-ball fees and media costs to win an advertiser’s media account, because they can make money on the money, via the total ‘extraction rate’ from the client’s business,” wrote Manning. “It’s also a gamble by the agencies on being able to word the client-agency contract in ways that prevent detection of the many extra sources of revenue and gaming the audit process (performance and compliance).”

“The older non-transparent services were hidden behind the scenes,” he added, “but now the client-facing agencies have to go out on the thinnest of limbs at the behest of the guys behind the curtain, re-selling PM and maintaining the pretense that it is the best thing since sliced bread.”