Psychology of the Bad Deal

Last week, we talked a bit about why it’s necessary to break large portal deals down into their component elements to evaluate them. But I deliberately avoided commenting on what happens when a planner finds out he’s willing to pay only $3 million or so for a package that was pitched by a sales rep for $20 million. That’s the topic for this week.

Evaluating any advertising (or any non-advertising) relationship between a client and a publisher’s site entails determining what the component elements of the proposed relationship are worth to the client. Under normal circumstances, this evaluation proceeds into a negotiation, with both sides tweaking the deal as necessary.

This negotiation is important. Not only does it allow for your client’s concerns to be heard and addressed, but it also establishes the price your client is willing to pay for what is being proposed.

In the days before increased competition on the Internet, many deals would end up being signed at a price closer to the client’s proposed price tag than to the publisher’s. However, increased competition for ad inventory and distribution are factors that are contributing to the rise in price of large, multifaceted relationship deals (especially exclusive ones).

When entering into a negotiation, there are a couple of principles that all media planners need to take with them:

  • The P.T. Barnum principle – If your client elects to underbid on a proposed deal, remember it’s likely that there are other, less educated competitors that might be willing to pay full price. In saying “less educated,” I refer to folks who may be new to the industry and are not necessarily as sharp as they could be with ROI analysis and overall deal evaluation experience.
  • The “If Jimmy jumped off the Brooklyn Bridge, would you do it too?” principle – While the movements of competitors are important and should never be overlooked, they should also never serve as the sole motivation for signing an overpriced deal.
  • The Money/Time principle – This logically follows from the P.T. Barnum principle: If a sales rep is evaluated on his or her ability to bring in ad revenue over time, why should he or she waste time negotiating with you and your client when a less educated competitor may be chomping at the bit to pay full price?

All of these are important points, but we need to be sure that the combination of increased demand coupled with the influx of less experienced people into the industry doesn’t cause us to make incorrect judgment calls. Repeat after me:

  • To me, a deal is worth only as much as my client is willing to pay for it, all things considered.
  • The Internet is a vast place that is nearly impossible to be locked out of. My competitors may lock me out of doing business with AOL or Yahoo or any of the other big players, but there are plenty of places to spend my money effectively, including within offline media.
  • If my competitors are stupid enough to sign the bad deals that I pass on, it is a long-term detriment to them.

Remember, a bad deal that a competitor signs is still a bad deal.

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