Why Agencies Aren't Delivering on Price Promises to Marketers

In Germany, Media Owners No Longer Willing to Play Rate-Card Games

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Media agencies have been winning big international reviews by promising major cost savings to marketers -- but now they're having trouble delivering on those discounts.

In Germany, there's some serious hardball going on. Media agencies are pressing media owners for discounts and -- for the first time in living memory -- media owners are refusing to budge. Six months into 2010, many agency deals are still not signed off on.

There are three reasons for the impasse. Germany -- like many markets -- went pitch-mad in 2009. Millions of euros in ad spending came to market, and to win business, agencies made price commitments that they are now struggling to keep.

The second reason is that media owners are no longer willing to play the game of increasing their rate-card price and providing greater discounts to agencies to create the appearance of greater concessions for advertisers.

Finally, for the first time in two years, marketing spending is going up -- an estimated 9% so far this year -- and the TV sales houses, in particular, feel more confident.

So six months in, some agencies and media owners have yet to conclude their annual deals for 2010.

Germany isn't the only market where media agencies are struggling. In any market hit by media inflation, including Spain and the U.K., the price cuts promised in deflationary 2009 are starting to look rash.

However the consequences of excessive price promises are becoming clearer in Germany earlier than in other markets. Back in 2009, an estimated 40% of Germany's total media spending of $28 billion was up for grabs. Clients such as Daimler, Ferrero and Beiersdorf, loyal to their media agencies for a decade or more, came to market.

Many pitches were primarily price-driven, and clients happily accepted cost improvements of 5% to 10% (and in a few cases more) in the price at which the agencies bought TV spots, poster sites and other media space.

Carat won Beiersdorf's $246 million and Deutsche Bank's $27 million accounts and successfully defended the $419 million Ferrero and $123 million Opel business. OMD kept Vodafone's $154 million account. Mediaedge:cia was the other big winner.

Adding to these public pitches were private renegotiations between incumbent and client, as practically all of Germany's biggest advertisers agreed to better deals, both for terms of service and cost of media.

In previous years, agencies would have shuffled their deals with media owners to deliver discounts for new clients at the expense of smaller brands and less savvy advertisers. This time around, however, the volume of discounts promised is simply too large.

The second tactic would be to pressure media owners into increasing both rate-card prices and the discounts offered to their biggest clients -- so the net price would stay the same or even increase, but clients would get the additional discount promised.

This process has been going on so long that many big advertisers pay less than 50% of the rate-card price.

This is creating a cultural problem. German media owners feel they are behaving more like Italians in having public prices that bear no relation to reality. They want a cleaner, clearer system.

All this comes as clients are getting tougher at ensuring that their media agencies deliver what they promised and do not make undeclared revenues.

Danone is currently taking its German media agency Carat to court for full disclosure of the rebates paid by media owners and confectionary giant Haribo -- has also followed suit.

Media agencies now face a tough choice: pay for the promises they made in 2009 or own up to clients for whom they can't deliver.

Dietmar Kruse is chief executive of Billetts Germany in Hamburg.
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