Opinion: COVID-19 is exposing ad industry weaknesses. Let’s start by fixing payment terms
We’re four months into the COVID-19 pandemic, and the ad industry is facing serious challenges. Digital ad spend has dipped 33 percent as buyers across industries reel from the impact of the pandemic. As a result, leading agencies have announced layoffs and cutbacks—business closures and reduced consumer spending are blamed as the primary culprits. But we also need to consider how payment arrangements are exacerbating our problems.
The crux of the issue involves the payment terms that agencies and ad tech companies have agreed to. Although publishers, ad exchanges and sell-side platforms request payment for advertising within 30 days, most agencies and ad tech companies give their clients 60, 90 or even 180 days to pay invoices. In this arrangement, agencies and ad tech companies play the role of the bank, carrying the balance for campaigns that already ran, while waiting to receive payment themselves. In the meantime, they must also pay salaries, rent and other expenses.
How did we get here?
It’s easy to blame the strict payment terms of publishers, ad exchanges and sell-side platforms as a whole. After all, you could argue that if they simply allow customers 45- or 60-day payment terms instead of the usual 30 days, it would ease almost everyone’s pain.
There’s a reason so much attention is focused on the ad sellers. For agencies and ad tech companies — particularly small ones with less negotiating power—missing a payment to an ad seller means getting shut off from its platform entirely. A lockout from a big seller would strike a death blow to a campaign, if it meant a large proportion of its ad spend couldn’t be activated. And brands become irate when campaigns are not running.
So, if agencies and ad tech companies are short on cash, they need to prioritize payments to their biggest ad sellers. In an economic downturn, this dynamic squeezes small companies even further.
These revenue pinches wouldn’t be so dire were it not for another negative ad industry dynamic: razor-thin margins. As more brands bring ad capabilities in-house, competition has reached a fever pitch, with many agencies joining a race to the bottom on pricing. I’ve seen agencies bid so low on projects that I’m not sure how they afford the necessary staff.
Don’t blame sound business practices
A 30-day payment term is standard in most other industries. How did those of us in the advertising business create a situation that allows up to 180-day terms? Ultimately, the discrepancy in payment terms is a symptom of wider problems within the ad industry. Asking large publishers and sellers to adjust their payment terms might be a temporary fix—but if we want to emerge from the pandemic stronger and more resilient against future crises, we need to make significant changes.
For agencies and ad tech companies to survive this crisis, we need to make changes now that reintroduce sanity into our industry. An effective COVID-19 response needs to both ease short-term pain and effect long-term change. To reach an optimum outcome, three things need to happen:
1. Payment term extensions: In the short term, the major ad sellers (whether they be publishers or exchanges) have an opportunity to show great leadership and empathy by extending their payment terms in a time of crisis. Relaxing payment terms would loosen the pressure on agencies and ad tech firms, and give the entire industry some breathing room as we continue to navigate the evolving situation.
2. A long-term, industry-wide shift toward reasonable payment terms: Our industry should acknowledge that 60-day-plus payment terms are no longer possible. Clients should pay faster. But to effect fundamental change, our industry will need to set this new expectation in a coordinated way. We should never have accepted the current state of affairs to begin with, and there’s no time like the present to change it (or to begin the process of changing it).
3. Ending the pricing race to the bottom: Agencies should push back against bottom-of-the-barrel fees with new strategies. Smart buyers understand they get what they pay for, and are willing to spend to ensure quality.
Changes to payment terms will help many agencies and adtech companies, but they won’t be able to save others. Inevitably, this will be a time of consolidation. Companies that aren’t diversified and lack a broad customer base will have a hard time surviving, no matter what their payment terms are with their vendors. But those that remain will lead the charge in building a better ad tech ecosystem.