What you see is what you get: Our take on media transparency and transparent pricing
Within the advertising industry a consistent point of confusion (and in some cases, contention) is media pricing, particularly when it comes to differences between traditional and digital. Back when traditional media was the only media, most agencies made money on media buying through some form of a commission. Agencies would use their buying power to negotiate lower prices on media. This meant they could charge clients the same rate the client would pay if buying directly, and they would still be compensated for their time. It was a win-win. So, naturally, when digital media buying came around, agencies were inclined to handle it the same way.
But times are changing.
Recently, Mark Pritchard, the Chief Brand Officer of Procter & Gamble Co., put digital agencies on notice. At the most recent Interactive Advertising Bureau's Annual Leadership Meeting, he called for industry-wide changes including more transparent pricing and fee structures, as well as uniform viewability and fraud standards. Some of the issues that prompted his call for new rules are confusing media contracts, inappropriate use of media funds, hidden fees, and confusing metrics. In a bold move, he announced that Proctor & Gamble would not pay for any digital media, ad tech, agencies, or other vendors that refused to comply with his new rules.
Here at CPU, we have always embraced transparent media pricing. We do not “mark up,” “gross up,” or otherwise charge commission on our media placements. There are never any hidden fees or undisclosed rebates. In fact, in most cases, we encourage our clients to pay their media fees and hard costs directly. That way, there is never any doubt about exactly what they are being charged for, and there is no chance that their media funds are being used for anything other than media. So, for us, Pritchard’s statement is a breath of fresh air. We’re in total agreement, and we’re glad to see the industry moving (or being pushed) in this direction.
It’s easy to see why clients would want more transparency and, from the start, we’ve believed transparent pricing and reporting is in our best interest, too. Here are a few reasons why:
Gross pricing is outdated when it comes to digital.
Even though digital media buying operates much differently, many agencies still charge gross media prices instead of the net cost they pay to the digital media vendor. In addition to the questionable legality and ethicality of the practice, grossing up media by the traditional 15% causes a number of problems in the digital realm. For one thing, with smaller budgets, 15% of the media budget is probably not enough to cover the agency’s services to place and manage the media. This forces agencies to make digital markups even higher unless they switch to a more transparent model. Gross pricing also assumes that the agency has negotiated a discount on media that the client could not get on their own. In traditional, this is often the case. However, with digital, in many cases, clients can buy their media directly for the same price. In other words, there is no agency discount to justify the percentage mark up.
Media markups are super confusing.
While some would argue that a 15% gross margin is the industry standard, others refer to a percentage markup, and hardly anyone understands the difference. If media buyers and account teams find it confusing (and they do), how can they be expected to clearly explain pricing to clients? (They can’t.) Some people use both “mark up” and “gross” to refer to the difference between the actual cost (net) and the selling price (gross), stated as a percentage of the net. Others mean the difference between the actual cost (net) and the selling price (gross), stated as a percentage of the gross. Confused yet? You're not alone. Even among advertising veterans, there is frequent confusion about how to calculate the “markup” or “gross.” If you multiply the net by 1.15, you end up with a markup that is 15% of the net, but only a 13.04% gross margin. To get a 15% gross margin, you have to “mark up” by 17.65%. This leads us to our next point...
Using net pricing makes billing easier.
If you don’t mark up media, you spend a lot less time calculating gross costs, creating multiple budgets, and constantly trying to explain to everyone involved which pricing to use and when. You also don’t have to continually remember or remind your account team or clients that you cannot just multiply the net by 1.15 to get the gross cost. Using net pricing makes it easier to bill and to train new media buyers, and as a client you know that your media budget is being spent on media. (Makes sense. I know.) It also allows for clients to pay their own media directly, if desired. Paying media directly is something we encourage clients to do. This saves time on billing, plus they can often monitor their campaigns directly, in real time, and there’s never any question about what media funds are being used for.
Marked up media makes it difficult to report digital results.
Reports generally provide results based on the net media spend. Marking up media causes confusion and makes it harder to determine value. If you supply a standard net report with data on the spend, clicks, cost-pers, etc., but then charge a grossed up amount the numbers won’t match up to the total budget. On the other hand, if you mark up the reported analytics to account for the marked up media spend, you double the work and can end up with skewed statistics, which makes it difficult to draw comparisons to industry standards or across campaigns. All of this confusion leads to added costs to the client and makes it difficult to use the data to make strategic decisions.
Transparent pricing builds relationships.
Sure, the above reasons all make my job easier, but the biggest benefit to transparency is this: being straightforward with our clients builds a foundation of trust and strengthens the relationship. In meetings, I can be open about how everything works, clear about expectations and pricing, and I never have to worry about accidentally using net costs instead of gross or mentioning a commission that the client didn’t know about. Budget planning meetings are more productive and less stressful. I can rest easy knowing that I’ve got nothing to hide, and I’ll never have a client leave just because they can buy media cheaper on their own. I’ll also never have to worry about a client digging into our billing and feeling as shocked as Mark Pritchard did.
That’s a big part of what we mean when we say we believe in better digital marketing for everyone. It may not be the way business has always been done, but we think it’s better. And we’re hopeful that the rest of the industry is starting to think so, too.
If you have questions about how transparent digital media pricing can work for you, please feel free to reach out!