Just over a year ago, in July 2016, the Association of National Advertisers (ANA) dropped a bomb on the advertising world in the form of a report on transparency. It found there wasn't much.
According to the study, which was carried out by consulting firm K2 Intelligence, many agencies were taking payments from media outlets.
As a solution, the ANA called for more robust transparency between agencies and clients, especially regarding how and why agencies spent money with media suppliers. "More transparency!" became the rallying cry for many in the industry.
The solution is right — but not the kind of transparency most are calling for.
Making agencies report credits and equity stakes may band-aid some short-term trust issues, but it doesn’t get us any closer to a sustainable partnership. In order to improve the relationship between agencies and brands, we need an economic model and set of metrics that create alignment.
In this mutually beneficial relationship, it’s not the costs and practices that need to be known; we need a way to bring transparency to value. Since consumer attention is the most basic building block of branding, advertisers would be best served by understanding the quality and quantity of attention they are buying.
A Broken System
Let's back up a bit: Media agencies make a large part of their revenue from a cost-plus model, a fee that amounts to a fixed percent of the amount of money they spend on behalf of their client.
This model, and its shortcomings, are outlined in depth by the ANA report. In short, if Company A wants to spend a million dollars on digital ads, its agency might capture an 8% fee for figuring out where and how to spend that money.
Here's the problem: This structure isn't really working for anyone.
The Costs of Cost-Plus
The cost-plus system fixes an agency's profit margin. Per the ANA report and many industry observers, agency fees have been heading downward in recent years, due to competition and a desire from buyers to rein in costs. With fees plunging, many agencies sought different revenue streams to stay afloat—like kickbacks and credits from media outlets.
These kickbacks aren't necessarily illegal; many of these practices are permitted by agency contracts. And as the ANA report clarified, just because a practice is non-transparent, it is not necessarily sub-optimal for the buyer.
But the ANA's revelations have made brands seek full-cost transparency: auditing transactions, reviewing any credits or kickbacks received, and mandating how the agency can use its funds.
That kind of surveillance doesn't exactly inspire creativity, and the overhead required creates the very inefficiency that advertisers want marketers to stamp out. The cost-plus model can also be stifling: Let's say the agency above determine out how to get the same results for only $500,000 of Company A’s spend. In this scenario, the agency's fee gets chopped in half; with a fixed percentage, there's no incentive to innovate.
The Wrong Kind of Transparency
But we can’t fault buyers or sellers for ending up in cost-plus. When products are difficult to value—like media—buyers tend to fall back to costs when trying to determine a price. What advertising lacks is an agreed-upon way to quantify the value of media, and this causes advertisers to fall back on cost models.
A New Metric
But there is an alternative to the Media Buyer Babysitting State. It involves switching from the troubled cost-based model—where everyone feels squeezed—to a value-based model, where advertisers simply pay for the amount of attention they receive.
To get there, however, we need a better way to measure the value of an ad. Currently, our industry uses the impression. Everyone rags on the impression, and with good reason: It's a metric that tells advertisers little about how much value they received for their spend.
It also incentivizes publishers to put as many impressions as readers will tolerate (and in many cases more) on a page, which leads to some truly hideous websites and dubious impression counts. It is hard to say that a tiny ad, viewable for one second in the corner of a webpage, made anything like an "impression."
Instead, for a value-based economy to work, we need a metric that actually measures whether people are paying attention to ads—whether media was indeed valuable.
Politely interruptive formats like full page mobile ads, skippable video or in-feed digital placements present an opportunity to quantify value. We think if someone chooses to spend time with a full-screen ad — not a banner surrounded by text — we can measure its value based on that time.
Rather than hoping a reader glanced at a blinking box, or enjoyed sitting through a forced pre-roll, politely interruptive ads give the reader control. This kind of ad also provides quantifiable and verifiable information that can be used to create the metric needed for a value-based market: the number of seconds that someone chose to spend with an ad.
The Right Transparency
Being honest about how much attention people pay to ads is a different kind of transparency than the one suggested by the ANA.
But it enables a value-based system that holds key advantages over a transparent cost-plus system. It actually incentivizes agencies to find savings, and it creates a market based on reliable, verifiable and transparent information. It can help agencies survive the squeeze of lower margins, and it gives media buyers peace of mind that they get fair value for their ad spends.
It's not the transparency that many are clamoring for, but it is the right kind of transparency for all of the stakeholders in digital advertising.