Commentary

Payment Terms Brands Should Know

Most savvy marketers understand that if their sole KPI is growth, then they are only looking at half of the picture.  A brand’s revenue analysis must compare both increased sales and how much it costs to drive those sales.

Procurement teams employ many creative ways to stretch margins as much as possible, including famously long payment terms, which have strained many vendors, digital advertising included.

Here’s the rub: When it comes to programmatic advertising, these now standard business procedures end up raising a marketer’s costs, perhaps without procurement’s knowledge. At the very least, longer payment cycles increases a media buyer’s direct costs by at least 2% of their total budgets, likely wiping out value earned by investing money before paying vendors.  

For marketers to have honest conversations with their vendor partners about costs, it helps to be informed about several standard practices that occur:

Factoring: This term, borrowed from the finance world, describes the business of lending money to vendors to provide them with liquidity as they wait to be paid by marketers. The 2% (a conservative estimate) interest fee is usually passed back to the marketer in the form of higher media costs.

Sequential Liability: This term describes a person or company that does not pay money that they owe until they receive money that is owed to them for the same work.

In a complex supply chain like digital advertising, this domino payment effect starts with agencies, which pay their demand partners late, which pay their supply partners late, which pay their publishers late. As a result of the sequentially late payments, companies have lower liquidity to invest in more engineering and growth, hampering the industry and stalling progress for the very brands holding back funds.

Float: Warren Buffet describes the practice like this on a Berkshire Hathaway site:  “Companies receive payment upfront and pay invoices later.  This collect-now, pay-later model leaves companies holding large sums of other people’s money -- money we call "float" -- that will eventually go to others. Meanwhile, they get to invest this float for [their] benefit.”

Certain parties in the digital supply chain have more power than others. Agency holding companies, Facebook and Google are examples of companies with a lot of liquidity even if they must wait for brands to pay them. They can take advantage of float, and hoard money, which gives them a competitive advantage over vendors that get squeezed.  

Media buyers are the only ones bringing a check to the digital advertising table.  Vendor costs are directly correlated to their fees.  If it costs them 2% to factor delayed receivables, it costs them 2% more to do business with brands. This additional fee is baked into vendor pricing, as are kickbacks and other contingencies to manage the above practices, all of which strain the supply chain.

Vendors also account for sequential liability, another additional cost making the magnitude of this self-imposed late fee a real drag on efficiency. Marketers are indirectly charging themselves a late fee due to blanket policies created by procurement to squeeze vendors across hundreds of supply categories.

No individual advertiser, even the largest ones, can solve this problem single-handedly. Hopefully, trade groups representing media buyers realize that while it’s not a simple initiative, switching to more favorable payment terms will save their members at least 2% of their $90 billion yearly digital marketing expenditures.

I encourage media buyers to use any advantage they have to negotiate better deals and advertise more effectively. However,  it’s important not focus so narrowly on making .5% interest on float that you increase your media costs by 2%.   

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