3G capital, the investor behind many large CPG brands, started imposing 120-day payment terms with vendors in 2008. Today, many brands have adopted the same span between service provided and cash paid. All sorts of supply chain vendors have felt the pinch. For the digital advertising industry, the pain is particularly agonizing because it stops the flow of cash in the programmatic markets, which transact in real time, using minute detail and billions of data points.
The final recipients of the cash— after a long supply chain of agencies, demand-side buying platforms, exchanges and sell-side buying platforms — are publishers. Publishers require payment in only 30 days. What’s a poor intermediary to do?
Media buying and selling is becoming more automated. TV is becoming more digital. A survey of the world’s largest advertisers by the World Federation of Advertisers found that programmatic advertising will grow from 17% of total spend in 2017 to 28% this year, and as high as 31% in North America. As more advertising goes real time, more intermediaries are calling foul on long payment terms.
Can’t Compete with Facebook and Google
At a recent event, Rubicon Project CEO Michael Barrett said that long payment terms are a tax on the industry for technology companies that are responsible for programmatic transactions. Companies like his, and those that are smaller and not publicly traded, today finance or factor these receivables, sucking up capital that could be used to invest in technology development or M&A.
Size matters. Google and Facebook have the capital to cover unbalanced balance sheets, and can satisfy long terms for buyers and short terms for sellers without an issue. Brands can use faster payment terms as a lever to balance the playing field for the entire marketplace.
I’ll See Your Net 60 and Raise You…
Advertising technology companies are adept at finding ways to stretch the money they do receive from advertisers in order to cover their expenses, but these tactics often cause more pain for the industry. Technology companies can drag their feet on reporting data to publishers, who need the advertiser’s information before they can invoice. They fiddle with campaign end dates and make goods in order to stagger payouts. There are kickbacks and many other creative money-saving tactics across the supply chain, which makes everyone less likely to be fully transparent with brands.
Transparency, which brands voted as the Association of National Advertisers’ word of the year for 2016, is an important factor in stabilizing digital advertising and getting it ready to accept another $70 billion or so of TV advertising spending that will become more automated over the coming years.
Brands can encourage more transparency and eliminate a lot of complex payment agony by offering better payment terms in exchange for data and openness. For many mid-sized technology companies, the chance to get paid a month or two earlier is the difference between making payroll or taking out another loan.
Let the Data Decide
Extending shorter payment terms to intermediaries doesn’t need to be sold internally as an act of kindness to the digital advertising technology ecosystem. Rather, it’s a revenue trade-off for brands. Brands can calculate the money they make by holding on to cash and compare that to the money they lose in the form of fraud and waste in programmatic advertising. Estimates of outright waste are between 20 and 40%. For brands that are ready to create a more profitable supply chain, offering better payment terms could be a huge incentive for wary technology companies to become more open with their tactics and streamline their business model, saving brands millions in the process.
For technology companies considering the move to a more transparent business model, asking for better payment terms should be a standard bargaining chip. When TV money starts pouring into the digital ecosystem (and it already has), the partners that are committed to quality and transparency will hopefully get higher priority than those who are unwilling to change their ways.