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Global versus Local ���Media Agency Remuneration Agreements

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© Copyright 2013

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Total Media Spend

There are economies of scale in media, but not always as much as you may think and not always in the places people look. Therefore many of the principles here can be used no matter what your media investment.

$1 billion in media spend

$10 million in media spend

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Media Spend vs. Agency Fee

WFA 2012

Traditional Media Digital Media

3% 6%

For large global advertisers, the agency fee as a proportion of the media spend has reduced over time, with traditional media fee half the digital media fee. The difference is due to the higher resource requirement to spend for digital.

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Media Owners Sales Incentives

Traditional Media Digital Media

20% - 30% 60% - 80%

For the media owners, the proportion of their revenue available to incentivize sales (discounts, rebates, added value, etc.) is more than double for digital over traditional as digital has low fixed cost, making the digital media market more dynamic.

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Comparing Agency Fee to Media Incentive

Traditional Media Digital Media

20% - 30% 60% - 80%

The average agency fee paid by advertisers is very much smaller to the size of the sales incentives the media owners offer to secure a sale. Advertisers should ensure their agency is negotiating more than their fair share of these incentives on their behalf.

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Global Economies vs. Local Opportunities

Even with the global media owners selling their media on a market by market basis, there is a very small economy of scale in buying media through a single global media buying agency.

However, if you are willing to overlook the

inconsistencies in the media

planning and buying across

markets of various agency networks, then

there is a much larger economy

of scale in media agency fees.

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Global Media Agency or Local?

WFA 2012

Traditional Media Digital Media

3% 6%

With a global network you can negotiate agency fees as low as 3% and 6% or lower due to economies of scale. But this could come at the expense of the 97% and 94% buying effectiveness as you could end up accepting convenience over consistency.

97% 94%

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Are You Still Paying Media Commissions?

7%

ANA 2013

While some markets continue to protect commissions (India, Brazil & Canada), most have moved away from commissions with the ANA recently reporting that the media commissions have fallen to just 7% of all media agency contract arrangement.

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Most are using a Cost Based Resource Model

CO$T

FTEs

VALUE

FTEs FTEs

VALUE VALUE

CO$T

CO$T

CO$T

?

?

?

?

? ?

OVER HEAD

OVER HEAD

OVER HEAD

The most popular model is a resource cost based model in retainers and fees. Yet this focuses on a cost that only contributes 3% - 6% of the total cost of media.

No wonder it leads to questions about resource levels, overhead costs, profits. In fact everything except the media value actually delivered.

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Performance Bonuses & Value Based Payment

$?

With so much at stake outside of the media agency fee, compared to the fee itself, why has there been such a focus on reducing the agency cost? Isn’t it smarter to give the agency incentives to raise performance and increase media value delivered?

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Value Remuneration vs. Performance Bonus

FINANCIALLY MEASURABLE

SUBJECTIVE

HIGH AGENCY INFLUENCE

(100%)

LOW AGENCY INFLUENCE

(0%)

DIRECT

RESPONSE

AGENCY SCORE CARD

SALES /

REVENUE MODEL

MEDIA BUYING PERFORMANCE

MARKETING AND BRAND

METRICS

There are many ways to measure value and performance in media and marketing. But you must consider the subjectivity of these measures and the level of influence the agency has over them. This will determine the level of risk and reward in developing the model.

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Implementing a Value & Performance Model

Example: Financial Services*

Media Investment = $100 million

Media Agency Fee = $2.4 million (incl. 15% profit margin)

30% Direct Response = $30 million

50% Network Television = $50 million

The advertiser had a traditional retainer model based on resource required. Yet we discovered that 30% of their media spend was effectively direct response and that they measured their TV buying – both of these are ideal for performance and value based remuneration. * Actual numbers changed for confidentiality

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A Composite of Fee, Value & Performance

Example: Financial Services*

Media Agency Fee = $1.36 million

Performance Bonus – 10% of fee or $240,000 at risk with 30% upside for decreasing CPM on Network TV.

Value Based Remuneration – made $800,000 of agency fee paid per sale. Plus an additional bonus for reduced CPA.

While the agency base fee dropped 40% this was more than compensated by the opportunity to earn bonuses based on the TV buying performance and share in the value created by optimizing direct response sales and reducing CPA.

Media Investment = $100 million

30% Direct Response = $30 million

50% Network Television = $50 million

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Considerations on Media Agency Remuneration

•  Commissions are out.

•  Cost based models most popular.

•  Performance bonuses increasingly popular.

•  But measures increasingly subjective.

•  Global and regional deals deliver fee savings.

•  But media value more valuable than fee reduction.

•  Consider remuneration based on business & media value delivered.

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For more information please contact…

TrinityP3 Pty Ltd Sydney

+612 8399 0922 Melbourne

+613 9682 6800 Hong Kong

+852 3589 3095 Singapore

+65 6884 9149

people@trinityp3.com www.trinityp3.com

@trinityp3 www.trinityp3.com/blog/ TrinityP3 Darren Woolley