The 80s and 90s were a more simple time for media-agency folk. There was only one commercial broadcaster before Channel 4 and Sky joined the mix. Print was all powerful with The Sun and The News Of The World reaching up to 4m people. Radio and OOH were key to any brand campaign and direct mail, door drops and inserts essential for direct response clients. People could only respond to ads on the phone or by going into a store. Tracking performance was easy. As we moved into the noughties digital media started to rise in opportunity and importance, causing us media planners to have to learn an entirely new skillset.
As well as it being a time of the biggest shift in the history of the media landscape, we also saw a similar shift in what clients were willing to pay agencies. Before the digital revolution, traditional media owners offered agencies 15% discounts, which many retained fully, creating healthy margins and some huge businesses. As media agencies grew in size they were mainly competing on media pricing, which led to a race to the bottom, offering clients better and better pricing alongside reduced fee’s to win pitches, eating into margins.
Reducing margins did not please the agency holding companies or their shareholders, so the media agencies had to become more innovative at making money and protecting their margin. They argued that digital media required more resources, so they could charge more for that, until that, too, was eroded through pitch promises. They then found that, due to the black-box nature of programmatic trading, margins could be added to the technology costs, driving income growth outside the view of the client. The whistle was blown on this practice leading to a huge increase in clients moving from the networks to independent agencies, which promised transparency and better service. Cheap rates were no longer the be all and end all for clients, but many still needed to reduce their agency costs.
To save money, the clients would hold another round of pitches, where agencies desperate for business would reduce fees and pricing, further eroding margins despite needing more people to run the business across the increasingly large and fragmented media landscape.
Was this the end of healthy margins once more? Oh, no. Our inventive media agency folk then identified that they could almost operate like a retailer by buying their own media inventory in bulk at discounted rates, which they could then sell on to clients at market value (or often much higher), restoring those dwindling margins. This trading method is called principal-based or proprietary media buying.
Whilst this practice continued for a couple of years without clients being aware, it has since been exposed by many pitch consultants, and it is now a huge talking point in terms of whether it’s ethical or not. On the one hand, the agencies would say that buying media this way means they can offer the lowest media prices to clients and provide better value, which is a key factor in helping them to win pitches where pricing based buying grids are hugely important.
This sounds well and good but ultimately when agencies are struggling to hit their targets they need to find ways to plug the gaps, and principal-based trading provides an opportunity to do that by charging clients more for the media. The lack of transparency in this process alarmed many clients, especially those who went through the same issues with programmatic margins.
As well as the lack of transparency, principal-based media buying also leads to questionable media planning choices, where agencies prioritise their own inventory, once again raising the question of whether agencies are working in the client’s best interests or their own.
The largest media agencies can clearly use this approach to win clients and provide the best prices, and as the dust settles it can provide benefits to clients but, as with anything in life, there isn’t a one-size-fits-all solution. In the past, we have talked about the squeezed middle of clients at networks who don’t spend enough to get the best prices or the best people, and it feels like it will be this group of clients who will suffer from principal-based media buying, whereas the agency’s biggest clients will be the only ones that benefit.
Main image by Alberto Contreras on Unsplash