By Mo Dezyanian

Recently, I was enjoying a pint with a friend, telling him about our successful home reno – how happy I was that our contractor gave us a great discount on some of our materials, On the edge of bragging about the deal I’d got.

My friend, a contractor himself, was less impressed: “You don’t actually know that,” he told me. “Sometimes the discount the warehouse gives them is much higher than what they give you. They might get 40% from the warehouse, and give you 15%.”

Suddenly I felt cheated! No one had mentioned this warehouse deal. Maybe a different contractor would have given me a much better discount. Maybe I could have saved far more on construction materials?.

But my buddy brought me back down to Earth: “At the end of the day, were you happy with the price and work?”

“Yes!”

Then, he said, everyone wins.

Does the same follow with media?

Mark-ups, McKinsey and Madison Avenue

The debate about mark-ups burns eternally. Last year McKinsey published a report on media rebates in advertising, including statements like:

“Many companies don’t have a clear view of where their dollars are going and what impact they are having. This lack of clarity means that a significant portion of media spend – in the form of fees or rebates – isn’t recouped by the marketer.”

The industry likes to navel-gaze and pretend the problem is unique to us. But middlemen, discounts and mark-ups crop up in many industries (check out Michael Farmer’s Madison Avenue Manslaughter if you’d like to explore how we got here). It’s a business problem, not an advertising problem.

Mark-ups were designed to allow media buyers to operate profitability and be compensated for their effort. The challenge today is, as the media buying landscape has shifted towards digital, media mark-ups have become more than simple compensation.

The shift to digital has led to significant automation, separating the buyer from the seller – a win for scale and efficiency. But automation introduces significant risk to the system – tech failure, human error, or both.

And who bears the risk of failure? The buyer? The seller?

Say you buy something from someone on Amazon and it arrives broken. Should Amazon handle it? And how should they handle it? By separating buyer from seller, we introduce the question of who handles the risk – a question that wasn’t as complex before. Back in the day, you would talk directly to the vendor who sold you the goods. Now, that’s not so easy.

The same applies to media.

Who owns the risk management?

Publishers took on the risk in the linear world; they were responsible for the placement. But that’s often not the case anymore, so we can no longer reasonably push that responsibility to them.

Adtech giants do sometimes take on that risk, as they should. But the reality is, adtech is enjoying an unprecedented duopoly. With that comes the luxury of picking and choosing how much risk is passed up or down the chain, and who owns it.

Mitigating risk now needs more defined ownership in the supply chain. After strategic advice and creativity, managing risk is one of the most important value-adds a media buying partner can offer.

Why so focused on cost?

As buyers, our conversations with marketers should focus on risk and result, not cost and effort.

With my renos, it doesn’t actually matter how much discount I got on materials, or even whether I got a ‘discount’ at all. Two things matter: Was I happy with the overall work? And was I happy with the overall price?

From a recent conversation with a new client:

“We had another agency pitch us. The guys were too cheap! They’d cut their margin in half to try and win the business. But what they failed to factor in is that lower margin leads to less effort on their part. Which jeopardizes my larger investment – the media placement. Maybe saving me a few dollars now, but risking way more down the line!”

Couldn’t have said it better myself.

And finally, back to bias

The problem isn’t that margins and mark-ups have risen. The industry recognizes that in a fragmented landscape, more effort is needed to impact consumer behaviour.

The issue is bias. A mark-up system can influence people to choose certain channels or platforms that best compensate them – consciously or unconsciously.

If my contractor had recommended a low-quality product only because of larger discounts, that would be an issue. When we talk about disclosing margins, the goal should be to uncover bias.

Marketers want to feel assured that their buying partner isn’t recommending a channel/platform because there is more in it for them. Marketers deserve better than that.

If we can work to eliminate bias from the supply chain, the margin-disclosure conversation becomes more fruitful. It moves into a more productive conversation about the level of risk and effort, who takes ownership, and how.

Essentially, it returns to the heart of the ideal business interaction I opened this piece with – where the client feels, with good reason, that they are happy with the price and the work. Everyone wins.

Mo Dezyanian is president of Toronto media consulting group Empathy, and a professor at Centennial College’s School of Business.