There’s an old saying in advertising, attributed to department store magnate John Wanamaker or to carmaker Henry Ford: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
Companies that pay advertising agencies to buy media time have another worry inside one of those halves. Business Insider says a growing number of advertisers think they are being cheated because ad agencies don’t always tell them about rebates, much less give them a cut.
A rising number of media companies pay rebates to ad agencies that do volume business with them. Ad Age reports that an unusually large number of companies are reviewing their ad accounts, often spurred by concerns that agencies are receiving rebates they were not told about. One ad agency head said these kickbacks were among the reasons he stopped working for agencies. (Here’s a spreadsheet with links to coverage.)
Most ad agencies make their income by taking a commission based on the amount of money their clients spend with media companies — newspapers, magazines, online, TV, etc. Agencies pay media companies on their clients’ behalf, using their clients’ money.
But it’s not always that simple, as Ad Age reports, because media companies have deals with ad agencies will return money (or give additional ad slots) to agencies based upon the volume an agency does with a media company, how quickly they pay, etc. Often times, the companies footing the bill don’t know about the money returned to the agency.
Here’s an example with some made-up numbers: I hire a neighbor’s kid to shop for me. He shows me paperwork that says a package of cookies costs $10. I give him $11.50 to buy those cookies on my behalf at the grocer — $10 for the cookies, plus 15 percent for his work. But he and the grocer have a deal I don’t know about: Because the kid shops on behalf of lots of neighbors, the grocer only charges the kid $8. The kid, whom I hired to act on my behalf, pockets that $2 and doesn’t tell me.
So instead of paying $11.50 for those cookies and the kid’s effort, I really should have paid $9.20 – $8 for the package, and $1.20 for the effort. In other words, I’ve overpaid by $2.30.
The key ethical problems seem to be that:
1. Ad agencies have a conflict of interest when they are rewarded for spending money that is not their own. If an agency knows it will be rewarded for volume, it may push clients’ money toward those media companies that pay rebates instead of ad channels that might be a better fit.
2. Companies don’t always know those deals are in place, which means they don’t know that they paid more for an ad than they thought they did.
The advertising industry calls this issue a question of “media transparency,” which is a different thing from companies being called out for hiding stuff such as ads that look like news stories and fine print that means “unlimited” service really is not. Indeed, many in the public who have felt taken by the usual lack of transparency inherent in much advertising likely feel little sympathy for the companies.
It is ultimately a question of loyalty: Do ad agencies really represent their clients when they’ve got deals on the side?
And it also is a question of transparency: What should you tell about outside deals to your primary client, the one with whom you’d have no business without?
An example might be real estate agents with dual agency, representing both buyer and seller in a transaction. Representing both sides of a deal can be ethically thorny, with some states forbidding the practice and others at least requiring disclosure. Even the National Association of Realtors’® code of ethics requires that its members disclose rebates.
The Association of National Advertisers, which represents companies that do lots of advertising through ad agencies, has issued a Request for Proposals to further study the practice.
As part of its research, it asked members how many were concerned about media rebates to agencies. The answer: 51% — or half, which brings us back where we started.