Kickbacks Caused by Bad Models and Exacerbated by Bad Metrics

Yesterday the ANA released a bombshell study where over 50% of respondents reported evidence of kickbacks to media agencies ranging from 1.7 to 20% of spend. Instead of a knee-jerk reaction demanding more price transparency, we should examine the root causes of kickbacks.

Kickbacks to media agencies are motivated by outdated economic models and exacerbated by opaque metrics like the CPM.

Media agencies are typically compensated by one or two economic models. In the commission model, an agency charges a fixed margin above the cost of media. This percentage ranges from 3–10%, meaning if an agency spends $1,000,000 on media they will receive $30–100k. Commissions are an unfortunate pricing method because they de-incentivize cost savings as they typically result in a decrease in top-line revenue for the agency.

In the cost-plus model the agency is paid a percentage above overhead costs. This means typically an agency charges a fixed % over salary + hard costs. This also de-incentivizes an agency from reducing costs or creating efficiencies, as their top-line revenue decreases.

Today most agreements between advertisers and their agencies are a blend of these two methods. In both of them kickbacks, or rebates in industry parlance, are the only way for agencies to effectively increase margins. Here’s a simplified version of how it might work:

A brand tasks an agency to spend $1m on media. That agency solicits proposals from media companies. The agency then evaluates the various offers and puts together a plan to spend across several media properties. The plans that come back will usually have a wide variety of options in terms of size, shape, editorial adjacency and placement, making it very difficult to evaluate them based on the amount of the resource that advertisers are after. In the case of branding, that resource is attention.

A few of the media outlets under consideration may seek to tip the tables in their favor by offering a “rebate”. For an unscrupulous publisher this is an easy way to make money. They mark up low quality inventory and then offer some of the margin from inflated prices to the agency in exchange for including them on the plan.

Thanks to the rebates some media companies are awarded business who didn’t deserve it, reducing value to the brand. So why can’t the brand just look at the media being bought and figure out something fishy is going on? For the same reason it’s near impossible for the agencies to evaluate the amount of attention contained within the individual proposals in the first place:

The metric used to delineate digital media buys has absolutely nothing to do with value captured by advertiser.

The impression is a horribly opaque unit that contains an almost random amount of attention. There is no information around how many other messages are competing for attention or the duration of exposure. This allows bad actors to substitute low quality inventory for high.

Switching from the CPM to a more accurate proxy for the underlying asset makes it harder to substitute low quality inventory for high, reducing the ill-gained capital that is needed for kickbacks. There are a few options for better metrics including engagement and time-in-view, at Parsec we believe time spent is the most consistent and ubiquitous metric for value media.

The CPM not only creates the artificial margins that funds kickbacks, it actually makes it impossible to get out of cost-plus and commission models:

If you can’t offer a buyer visibility into the quality and quantity of the good they are buying, they will ask for price transparency.

Since impressions don’t offer data around how much attention they yield, buyers insist on cost-plus and commission models. However, when metrics that accurately reflect the quality and quantity of media are used, like time-spent, buyers don’t necessarily require cost transparency.

In this sense, the accuracy of time and other attention-based metrics could enable agencies to shift into value-based, or non-disclosed, models. It becomes question of how much attention an agency can deliver at a certain price point. Then agencies can grow margin by innovating through talent, technology and data that help them source attention more efficiently… and not rebates.