Advertisers shape the agencies that serve them.
Agencies often change their org structures to meet the demands in client briefs. As a result, over time, agencies have evolved from creative-first to full-service, and from full-service to best-in-class as the role (and cost) of media grew during the 1980’s.
More recently, agencies have drifted back toward integration on the one hand, while the agency of record model slowly erodes on the other.
The next evolution demands buying structures to integrate data and creative in order to effectively optimize auctions.
The pitch process could be the catalyst for that change.
Pricing exercises are a staple of media agency pitches, and they are designed to achieve one or more of three principal goals:
To get a sense of the future price of media from a number of active market players.
To inform the selection of the winning agency (hopefully the smartest is also the best value).
To form the basis of bonus or malus clauses in agency contracts.
Pricing exercises are valuable, but flawed.
First, they often call for “like-for-like” pricing comparisons, which make sense superficially but fluctuate in audience size and composition, stripping the comparison of meaning. They also don’t consider upfront vs. spot pricing, and the value of certainty on the one hand and flexibility on the other.
But most importantly, they neglect to test how agencies drive value through programmatic or auction driven media buys. Assembling a media plan at auction is an entirely different exercise that a focus on historic pricing does little to illuminate.
Auction-driven media plans require a ‘walk and chew gum’ mentality that combines consideration of long and (sometimes very) short-term goals with the ebb and flow of supply and demand. While an agency may aim to deliver finely paced and aggregated reach and frequency goals on the one hand, it might also be optimizing Amazon rankings, or selling commodities like hotel rooms. Each task requires intricate bidding strategies that fulfill timing, pricing and performance objectives.
To add more complexity, the auction winner isn’t always the highest bidder; the seller minimizes inventory usage if they sell to the party most likely to achieve an outcome.
Clients need to realize that dynamic markets need a completely new playbook. It’s hard to imagine why brands attempt to evaluate their partners with a pricing exercise that, at best, represents a thinning slice of how media markets operate.
As we emerge from the pandemic, maybe it's time to retire this tired and tiring process.
John Donahue is CEO and cofounder, of WLxJS.