What your media agency might not be telling you

Imagine for a second you’re a media agency boss looking to milk every last dollar from your clients. What strategies could you employ? In a hypothetical piece that first appeared in EncoreNic Christensen puts himself in the big chair.

I’m going to begin with a confession: running a media agency ain’t what it used to be. Based on what clients pay directly to their agencies, few of us would still be in business. So these days, our agency has to find other ways.

I run Agency ZYX, one of Australia’s top 15 media agencies with a roster of clients, both local and international, ranging from small to large. We spend hundreds of millions of dollars a year on behalf of all those clients.

Control of this revenue, and the hands of which media outlet it ends up in, makes me one of the more important players in Australia’s media landscape. At least that’s what the rest of the world thinks. The truth is, I’m not as powerful, or as profitable as it might seem.

What they don’t realise is that the media agency business has changed and the pressure to perform means I am increasingly left to find new and inventive ways to make money – and that often means looking for clients who aren’t savvy to the myriad tactics our agency uses to make a buck.

Our business model

I admit, I long for the old days. Back in the era of accreditation, media agencies had a guaranteed commission, and we weren’t all in this race to the bottom, competing for every piece of business on price.

Back then you also got a clearly disclosed discount from the media owner when you bought ads on behalf of a client, usually around 10 per cent, plus you got your 7.5 per cent service fee. It was a simpler time.

Buy $100 of TV time, pay $90 and keep a $10 commission. Then the client paid an you an additional $7.50. Easy, right?

You’d also bill the client straight away, but wait until the media owner’s invoice hit 90 days before even thinking about paying. Back when interest rates were high, that was a useful revenue stream too.

Then, it was a reliable system where agencies were healthy because we had to be. After all, we were liable for client defaults.

Two decades on and the accreditation model is but a distant memory and I’m in a competitive market where client pitches are won and lost on price. The result? Those service fees are down to as low as three – sometimes even two – per cent and that’s simply not enough to make ends meet. Not without add-on services, anyway, and any halfway savvy client expects you to give back the agency discount too.

Add to that, Agency ZYX is also part of a global network and I have very specific profit targets, each and every quarter, which are not to be missed. This means every year the decree will come down from head office and they will have decided my profit target. In a market that is growing at four or five per cent if we’re lucky, they can still be asking for anywhere between 10 and 20 per cent growth. That’s right – up to four times the growth of the market and let’s be frank: I’d have to win a hell of a lot of new business to achieve that.

One year I actually calculated what that required if you were to translate the target into the income from assumed billings and then the amount of billings in the market. The result was that our agency would have to win more than 50 per cent of the pitches in the total market for that year to make enough revenue to get there. And that’s just not going to happen.

You can try and argue with head office. But it won’t get you far. I might technically be judged on five or six key performance indicators but ultimately the indicator with the most weight is this: does my agency hit that profit and revenue growth target for the year?

And while I appear to be one of the most powerful people in the local media and marketing world, control of my agency is increasingly shifting overseas. As part of the global network, power is more and more in the hands of a bunch of number crunchers half a world away. Sometimes it’s not even my boss. It’s some accountant, who I’ve never met, on an international conference call passing judgment on my business plan and making it clear that I’ve got to find revenue from somewhere.

These are the challenges I now face: clients who think a two per cent service fee is a decent commission and an international head office that, every quarter, wants my agency to outpace the Chinese economic growth figures. Is it any wonder I have to be on the lookout for new ways to make money from our existing clients while also looking for new clients who are willing to join the ride on our client merry-go-around?

The clients

At Agency ZYX we have a number of big clients, who are mostly publicly listed companies, and who we rely on to ensure we pay our bills, but it’s the smaller clients who can really help us reach our profit targets.

More on that later, but let me start by explaining the process by which a client usually comes to us, regardless of whether they have a pitch consultant or procurement executive to hold their hand. As part of the process the client, big or small, will typically sit down with me and ask: “Why are you different to anyone else?”

When that happens you invariably talk about a number of things, like the depth of your talent pool – “Have you met our head of digital? He’s brilliant” – or our ideas – “our strategy department recently came up with a campaign that got a client more than $50m in sales from a mere $5m spend” – but very quickly the conversation moves on, and I find myself talking about the intangibles: things like culture and teamwork, things that are ultimately not all that different to our competitors.

Which leaves us with our one competitive advantage. The place where Agency ZYX really differentiates ourselves: our willingness to compete on price. This is usually gold to the chief marketing officer, particularly those who come armed with their procurement department, and who always seem so thrilled to see that they can negotiate us down to a margin well below anything the previous agency, or any other agency, is willing to accept.

They don’t seem to consider that by paying us an agency fee of as little as two or three per cent of their total spend, we will have to make it up elsewhere. And there are many, many places to do that. You’d think clients would look at our nice offices and large and well-paid teams and realise that the low agency fee barely covers our overheads. Yet very few do. They don’t even seem to ask themselves how many people will really be working on the account.

If you added up the number of pitches we’ve won based on promising that at least half of our brilliant strategy director’s time will be devoted to the client, we would need to clone him at least three or four times.

The low service fee works particularly with the old school CMOs who worked their way up from the ground floor within their own organisation but aren’t that media savvy. They’re the ones who it becomes clear from the pitch brief, and a short five minute conversation, that they’ve decided they’ll go with the agency who will get them the lowest cost per thousand.

Smaller clients also struggle when it comes to comparing media agencies, but the difference between the bigger clients and their smaller counterparts is not just the questions they and their bean counters ask, but also what deals you can strike. Bigger clients come with procurement departments and auditors and will usually have the smarter chief marketing officers. Smaller clients are usually more amenable – particularly if you give them the royal treatment and duchess the hell out of them.

A roster of smaller clients, preferably privately owned, or at least with their head office overseas, can be very lucrative. Not only can you negotiate a raft of profitable add-on services (would you like us to do your social media? Great. What about data or SEO? Excellent) but you also have more leeway when it comes to telling them the rate for the media you bought for them. Sure, they might question you on the rack rate but then you give them a discount and tell them what a great deal you’ve negotiated. For most smaller clients, it is difficult for them to know precisely whether what the agency has given them is good value.

All clients, big or small, can also be sweetened by some basic client relations and at Agency ZYX we are always eager to reward those who spend their money with us, especially when the bill is carried by others i.e. the media owners.

These are not bribes (although I have known clients who expect a decent Christmas present). Rather it is hospitality dressed up as relationship building, or even learning opportunities.

You tell the clients: “I think it’s important that you attend X major overseas sporting event.” Or my personal favourite: “I think it’s important that you attend the Y cultural festival in Europe. Your wife would love a break and perhaps you, her and the kids might want to go to Disneyland while you’re all on the trip.”

Issue 23Note: this piece is a long read. If you’d like to lean back and enjoy it, download this week’s Encore to see the piece as it was originally intended. We say it all the time, but this time we mean it – IT’S LONG.

Click on the image of the tablet to download for iPad or Android.

These days, the Cannes Lions Festival is increasingly frequented by marketers, often hosted by their agencies. The CMOs who take this sort of sweetener think of it as some wonderful job perk and you’d be surprised how persuasive the tactic can be. The subtle sense of obligation helps lock everyone in place.

The best part of this strategy? It’s not our agency who pays. Rather we get the media owners to pay for this hospitality as part of the way they like to wine and dine agency folk and their clients. It works particularly well at sporting events they have the broadcast rights to, even if the last year or so has seen that dialled back as media owners cut costs.

Other media income

Indeed, when it comes to media owners I should explain that with only around 40 per cent of Agency ZYX’s revenue coming directly from our client fees, it is the media owners that help our agency make up a large part of the difference. This is where the wonders of other media income and in particular “value banks” of advertising inventory come into it.

As a media agency with millions of dollars to spend in the market, we know how to buy. Indeed we know how to get the best deal, for ourselves as much as the client. When we sit down with a major TV network, radio network or publisher, we will commit to an upfront spend for the year. But also make it clear we expect our ‘agency discount’.

These days we usually don’t ask for cash – rather we tell them we want inventory. At Agency ZYX we can then sell this inventory on to other clients who don’t know they are buying it from us. If I make a deal for $200m with a TV network, I expect something in return and a $10m or $20m agency discount isn’t unreasonable. After all, I could spend the money with their rival but no-one, particularly the media owner I’m negotiating with, wants that.

It’s also easy enough to negotiate these deals because most media outlets don’t sell all their inventory, for example, the free-to-air commercial TV networks now have all those wonderful digital channels that they’re not selling out. The “value bank” also becomes very helpful if I need to use that inventory to land a client or top up a client’s campaign. Remember I always compete on price but it is also an important revenue stream.

Now I know, technically, we should be giving any discounts back to the client but with service fees as low ours that’s simply not going to happen.

It’s for this reason that I avoid putting the ‘agency discount’ through the agency itself and rather make a deal with the media outlet where they’ll commission me to do research for them, usually through a subsidiary.

Now it might be that a $5m or $10m research project involves the less-than-onerous task of producing a 10-slide Powerpoint preso, but that will be enough. We can justify the payment to our accountants and in return I’ll put tens or hundreds of millions’ worth of client business to that media outlet.

Clients are always paranoid about the upfront commitments. They worry about being pushed into a medium which isn’t right for their product or service. God bless them. But I tell them it’s simply the way we at Agency ZYX do business. After all, how do they think I get them such a good price?

And it’s not that our agency doesn’t tell our clients about other media income somewhere in the fine print. It’s usually there under “subsidised business” or built into our “value extra”. Plus the legal people also made sure we put it into our contracts so we quietly changed our description in the paperwork to “vendors of media” as well as agents for the clients. So you know, full disclosure.


The emerging goldmine is the world of digital. It’s Nirvana for our agency because no-one understands what digital really is, let alone how its works or exactly how you put a value on things. They say that ignorance is a profit opportunity, for anyone in any sphere, but this is particularly the case when you’re talking about the wonder that is demand-side platforms (DSPs) and the digital advertising world.

For those who don’t know what a DSP is, simply put it is a system that allows buyers of digital advertising to manage multiple ad exchange accounts through one interface. It costs a bit to set up but once an agency has its own digital trading desk it can be very lucrative. We can bid for online ads in real time across a huge number of sites.

Recently the industry got its knickers in a twist over DSPs and the practice of arbitrage, which, when you do it right, sees your agency use its own DSP to take advantage of a price difference between two markets and basically buy really cheap before hiking the margin up more than is usually acceptable.

But digital offers many more opportunities than simply adding a high margin to display advertising, although I should probably admit about a year ago I told our digital department to put an internal quota on the amount of client business coming through our internal agency DSP.

This isn’t something we talk about in-market, but needless to say we have had a lot more clients launching digital campaigns and it’s been very profitable.

But DSPs are not the only place where you make money on digital. What you have to understand is that digital is a volume game and there are many more opportunities to clip the client’s ticket than the traditional mediums offered. One of the most effective approaches is to mark up what we charge on ad serving. This is where we substantially increase ad serving costs above the actual cost of delivering the online ad.

Now it might only cost a couple of cents to serve that ad per thousand impressions but because many clients don’t understand digital, we are able to mark it up to five, 10 or even 15 cents. That 500 to 1,500 per cent mark up is very lucrative. On a major online campaign we might be serving as much as 100 million page impressions. It quickly adds up. It’s also not charged as an agency fee but rather it is charged as “the cost of trafficking” and while it can be quite small and inconsequential for some clients, it can also be a big earner for us with others.

We’ve actually had clients that we charged more in ad serving fees – sorry I should say “cost of trafficking fees” – than client service fees. And as I’ve said before, if you don’t want to pay it, the client service fees can be made up elsewhere. Some of the bigger clients with really smart digital people in their organisations are more aware of this sort of stuff. However, most of our clients are still happy to buy digital ads from us but prefer “performance buying”, where the client only pays if the consumer clicks on the ad or does something after being exposed to it. The thing is, the cookie expiry window on performance buying is often as long as 28 to 30 days. So say a person who was exposed to your banner 27 days ago for less than one second takes some form of action, well, then you pay. The beauty of this approach is that by serving 100m impressions in a country with a population of 22m, it’s actually very hard to find somebody who wouldn’t have supposedly been exposed to a banner. Thus “performance buying” can also be very profitable. Indeed when it comes to digital there are lots of ways to get paid. And the good news is there are still other digital revenue streams coming down the pipeline as new partners arrive or set up in Australia.

These businesses will typically be touting access to emerging platforms, and we’ll happily bring them in and introduce them to clients, but only if we’re also assured of getting our share. So with our digital business partners we make sure that if the client spends $100 with them at least $10 goes back to us. It’s the price of doing business.

Issue 23Note: this piece is a long read. If you’d like to lean back and enjoy it, download this week’s Encore to see the piece as it was originally intended. We say it all the time, but this time we mean it – IT’S LONG.

Click on the image of the tablet to download for iPad or Android.

Now I know what you’re probably thinking. Right now digital isn’t a huge part of client advertising spend. True, but just wait. The money going through DSPs this year is somewhere between $100m to $250m but give it three to five years and it will easily be somewhere between one and two billion dollars and that’s when our agency will really be able to cash in.


The other question you’re probably asking yourself is why aren’t clients more savvy to our ways? Surely clients audit the books and check they’re getting value for money? Well some do.

But there’s two points to make. One is that smaller clients don’t necessarily know to ask to audit the books or even if they do, they rarely ask.

Bigger clients, usually those with all-powerful procurement departments, do but the good news is that while clients have the right to audit the books, they can only audit their little part of them. That’s why it’s easy to hide things. Without a complete look at the accounts it is easy to slide things off to the side. For example, when it comes to a campaign, the auditors come in but no-one ever checks whether what we are sending is a complete picture of said campaign.

At Agency ZYX we can play hide and seek all day long because we know the auditors will never get a complete picture of a campaign let alone a complete understanding of our accounts. It’s this opaqueness that allows us to stay in business and not get called out. But accountability can also be a profit opportunity. Our agency has clients who agree to bonuses if we hit our targets. These targets are important for reassuring our clients that we are results-focused and eager to ensure their campaign’s success. Who sets those performance targets, you ask? Well, we do. Who measures whether we achieve those targets? Again, we do. Unsurprisingly, we almost always get paid 100 per cent of our performance bonus. It would surprise you the number of clients who don’t baulk at this. In part, I suspect it’s because they make the CMO look good to their own boss.


The other question I increasingly find myself asking is who do I work for? The client? Not so much. In reality, clients come and go but our relationships with media owners last much longer.

A major TV station has a total of around $1bn worth of airtime and might spend a quarter of that on on-air promotion of its own shows and another $100m on media agency rebates. That means they are very interested in who buys that remaining $650m and ensuring they get a good price for it. They also want to make sure media buyer money doesn’t suddenly go to their rivals.

Many people don’t realise media buying often still comes down to the relationship. It might be the 21st century but even today the big money deals are done at a very senior level and that is why trust and loyalty often play a major part in the negotiations. In the end, my relationship with the media owners is an important part of our business. If the agency trading director falls out with a major media owner, you may have to fire them.

While our agency has millions of dollars running through it, our business revenue is closer to the $100m mark and a large part of that, year in year out, comes from media owners. I’d be lying if I said the value bank didn’t mean I owe them a certain loyalty.

Why it won’t change

Does that mean I work for the media owners? No, it doesn’t. There are many of them who would prefer to keep their rebates and invest them in content for their business. But they play our game because they have to. They’re complicit in the system just as much as the clients are. Some clients are simply ignorant. The system of media buying is so complicated and has made it easy to mask, hide, create confusion and obfuscate some of our agency’s most profitable practices.

And many clients may have a sense we are making extra money but let’s be frank – we wouldn’t be able to pay the bills if we didn’t.

What they don’t know is where it is coming from and many of them seem to think that it is being made at their expense so feel that some money should be coming back to them.

If you really want the truth, Agency ZYX is singularly working for itself. Our agency is taking a stand for the client but then taking money that, in a sense, belongs to the client.

It is also exploiting the competitive pressures on the media owners who are struggling with a business model that, regardless of the medium, is being challenged in some way by the internet. Any TV network would kill to have extra money to spend on content but it has to give away as much as 10 per cent of its own air time, just part of the cost of doing business.

Likewise it’s also the client’s fault because they sit there and think that two or three per cent is a good whack for agencies. It’s just ridiculous. But they won’t pay a higher service fee because they don’t necessarily see the value in what we do or the results we deliver, or even if they do their procurement department will insist on going with the agency charging the lower service fee.

The worst part of all this is that there’s nothing anyone can do about it. Sure, someone will occasionally leak documents to a newspaper or one of the trade press outlets. It happened in the UK 10 years ago.

But usually no journalist can publish anything because when they take the document back to the agency, or even to the client involved, everyone refuses to confirm the documents are authentic. It is a conspiracy of silence. Anyone who knows about these practices is not going to talk and therefore nothing is ever going to be proven. We have a situation where everyone is complicit, in some way, shape or form.

Our media agency, the media owners plus the clients all suffer in some way but no-one is brave enough to talk about the issue or how to fix it.

Don’t get me wrong, it could change. The marketing industry could take action. But is it brave enough to talk about these issues? Probably not.

And as the agency boss, I have to feel bad for my company. Agency ZYX has good people, people who want to do the best by our clients and who do good work when it comes to strategy, buying and implementation in the modern media environment. Ultimately our agency is a victim of the situation, just like the rest of the industry.

Editor’s note: Encore would like to be clear that the practices discussed in this article are hypothetical. This piece represents our attempt to begin a discussion around transparency and some of the more dubious potential practices in the media agency landscape.

Issue 23This story first appeared in the weekly edition of Encore available for iPad and Android tablets. Visit encore.com.au for a preview of the app or click below to download.


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