Advice & Best PracticeComment

Why CFOs should care about media rebates

Once the U.S. constitution had been established in 1789, Benjamin Franklin wrote: “In this world nothing can be certain except death and taxes.” When thinking about certainty in the ever-changing world of media and advertising, CFOs should add ‘media agency rebates’ to the list of hardy perennial topics. Without close scrutiny, media agency rebates are an area in which companies can experience significant value erosion from their marketing investment.

Rebates are often provided by publishers and other supply chain vendors to media agencies in recognition of bulk or volume purchases, and they’re a frequent bone of contention between agencies and advertisers. Agencies are often keen to hold onto these rebates for themselves and generate additional revenue for their own operations or their holding companies. They say that rebates only exist because they are providing financial stability for publishers and platforms, and that they are a bonus for them rather than their advertiser clients.

Meantime, advertisers believe that these rebates should be passed on to them in proportion with their spend via their agency. This is because – as they say with good reason – it’s their media spend that funds the entire advertising ecosystem. What’s more, when they have proper access to agency benefits, advertisers effectively pay less for the media space they buy. It’s no wonder they’re keen to secure all relevant rebates. And there’s a vital role for both procurement and particularly finance teams in advertiser companies to play to ensure that rebates are returned as they should be.

This position of difference between media agencies and advertisers leads to another certainty in this increasingly uncertain market: agencies changing the terminology that describes rebates to make it harder for advertisers to benefit from them. This is often because the new terminology or mechanism by which the agency receives the rebate is not specifically called out in the contracts between them and their clients. We’ll return to this shortly.

Putting this in context

The economics of advertising have changed in the past decade. Many brands cut their budgets in response to the global recession. This was despite evidence since the 1930s that those brands that advertise through a recession do better during and once it’s over. In many cases, budget cuts – and tighter budgeting – have been retained by brands since the most recent recession.

In the same period, procurement and finance departments of many big brands with major advertising budgets have become much more closely involved in media buying. This was not before time, considering that advertising is the biggest single investment that many brands make with external partners. Media space is the largest single line item, and media agencies most brands’ biggest single marketing supplier. Nevertheless, despite increased scrutiny and tighter budgets, the leading media agency groups continue to turn in impressive growth figures.

Moves to make the market more transparent

In 2016, the Association of National Advertisers (ANA) in the United States published a pioneering report that showed the first evidence of non-transparent media trading practices in that market – the largest and one of the most significant and sophisticated in the world. Among the non-transparent practices revealed by the study was agencies holding onto and benefitting from rebates. These rebates or benefits had been generated as a result of bulk buying of media inventory from major publishers and platforms. Because, in many cases, there was no explicit clause in the agency-advertiser contracts requiring the agencies to pass these benefits onto their clients, they were doing just that: not passing them on.

The ANA report was a wake-up call to the industry, and for each of the past three years many hundreds of leading national and global brands have chosen to review their agency relationships and contracts. And while it is true that many advertisers have chosen to stay with their established agencies of record – after all, it takes time to build up a relationship and a rapport between such important commercial partners – even those that have stayed put have tightened the terms and conditions of their contracts. The ANA recommended that benefits or rebates should be passed back to advertisers in full, and many advertisers have had clauses stipulating this requirement written into their revised contracts, which are typically now more open and transparent. CFOs can play a pivotal role in helping marketing and procurement teams ensure the right clauses are written into these contracts.

It’s also important to reflect that if agencies secure and are able to hold onto rebates from particular deals with specific publishers – simply because their contract doesn’t say that they can’t – this has the potential to create a conflict of interest for agencies in the media planning and media buying process. This conflict of interest could make agency performance both less objective and less effective. Again, CFOs can use their experience in other areas to help colleagues in marketing address this conflict of interest.

New name, same old benefit

Going back ten years or more, rebates were often known as AVBs – Agency Volume Bonification – and contracts frequently included clauses requiring their agencies to pass these back to them. But as advertisers have demanded increasing transparency and the right to get back what is rightfully theirs, some agencies have changed the terminology they use to describe what are essentially the same thing: rebates. We’ve seen them described as “free space”, “inventory media”, “service level agreements”, and “value pots”. And if these terms aren’t explicitly used in their contracts, the benefits aren’t necessarily passed back to the advertiser.

We have extensive experience of scrutinising media agency contracts in all the major media markets worldwide. We also regularly assess the extent to which agencies are applying both the spirit and the letter of these contracts. This experience suggests that many advertisers are missing out on benefits. We encourage our clients to work in cross-functional teams – marketing, finance, and procurement – and to work in close partnership with their agencies to secure the benefits that are theirs by right. This is true no matter how agencies describe media benefits.

CFOs should care about and invest time and energy in ensuring that media benefits are returned to their businesses. This will help their marketing colleagues achieve more with less and secure enhanced return on marketing investment. With some indicators of economic slowdown and even the potential threat of a new, global recession in a period of geopolitical uncertainty, companies need every advantage they can get.

Stephen Broderick is Global CEO of FirmDecisions, a marketing compliance specialist. The company provides financial transparency in the advertiser-agency relationship to the world’s biggest brands.

Show More
Back to top button