Is this hourly pricing model right for today's digital media agency?
It's funny how people deride Microsoft for not being successful in advertising technology when 80 percent of digital media dollars are transacted using its media planning software. Despite the fact that we live in a world where computers can evaluate hundreds of individual bid requests on a single impression and render an ad-serving decision in under 50 milliseconds, the overwhelming majority of display inventory is bought using email and fax machines. Those media plans are manually created in Excel.
Terence Kawaja of the famous LUMAscape maps, which depict the 300-plus companies that enable the 20 percent of display buying that happens programmatically, once said that "Inertia is the agency's best friend" when asked why holding companies were not doing more to bring innovation to advertising. I imagine that part of what he meant was that their common business model (billable hours plus a negotiated margin) does not create an incentive for efficiency. On the contrary, complexity in media planning means more billable hours - as well as a built-in need for agencies' existence. After all, if media buying were easy, then marketers would do it themselves.
A result of this inertia is the fact that Microsoft's business products (Outlook, PowerPoint, and Excel) power the majority of digital media buying today. After research is done in platforms like comScore and Nielsen, media planners output a spreadsheet, create a request for proposal (RFP), and begin the long process of gathering other spreadsheets from publishers. After a few weeks and $40,000 in hours spent cutting and pasting, a media plan is born. This grueling process has the average media planner spending more time on manual, repetitive processes than on strategy and high-value, client-facing activities. You would imagine that agencies would work quickly to adopt technologies that make the transactional nature of media planning more streamlined.
It seems like agencies don't care, as long as they are getting paid for their work, but there are real problems with the Excel model. Here are a few to consider:
At the macro level, the cost-plus pricing model's principle disadvantage is that it creates what economists call a perverse incentive or, put more simply, an incentive for inefficiency. When that cost model is applied to digital media planning - already fraught with inefficiency - you have an environment ripe for disruption. The advent of new, platform-driven media planning and buying technologies is spawning a new era of "systematic guaranteed" buying, which promises to streamline and centralize the way banner ads are bought today. Agencies will be able to dedicate more hours to client-facing tasks and strategy, and publishers will be able to manage their transactional RFP business more seamlessly, and be able to focus their sales teams on super premium, high CPM sales.
By eliminating much of the human cost of media planning and buying, technology can help add more value to the media itself - the real "plus" that we have been looking for.
Calculator image on home page via Shutterstock.
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Chris O'Hara is an ad technology executive, and the author of "Best Practices in Digital Display Media," a contributor to ClickZ, and the author of the new whitepaper "Best Practices in Data Management." He can be reached through his blog at www.chrisohara.com
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