Inventory media is now the biggest game in town
Over the past 26 years, FirmDecisions has completed more than 8,500 contract compliance audits of media and marketing investment in 104 markets and hundreds of agencies. We have noted the significant growth of inventory media sales to our clients and the “mis-selling” of such media due to failure to comply with contracted terms. This non-compliance has resulted in significant financial returns for clients on their audit investment. In the past few years, almost 36% of all audit findings related to inventory media. Furthermore, this share is increasing every year. Inventory media is by far the greatest transparency and compliance issue, overtaking rebates/ AVBs and unbilled media in scale and issues.
What is inventory media?
Most advertisers’ media plans include inventory media. Before recommending best practice in getting a fair deal from inventory media, we need a clear and simple definition of the category.
Inventory (or proprietary) media is (or should be) media space sold by agencies to clients on a non-transparent basis, with strict no-audit clauses, that promises to deliver better pricing than normal media buys. Historically, it was generally accepted that, to qualify as inventory media, the agency had to invest in the media up-front using their own resources, although this boundary is now being pushed by agencies. The nature of the trade means that the agency acts as a principal and not agent. Choosing to include inventory media on a media plan is an opt-in for advertisers, and many choose to invest significant volumes, generally between 10% to 20% of their media budgets in inventory media.
Agencies have to make a higher margin on inventory media to offset the risk of buying on their own behalf. That said, there’s less of a risk today compared with when inventory media first appeared. This assumes of course that there is a cost to the inventory media they acquire. Furthermore, rather than only buying and paying for media upfront and therefore holding an “inventory”, some agencies are committing to credit lines with publishers and platforms which they draw down on once their clients approve inventory media on a media plan. A general opt in also allows the agency to plan, acquire and allocate their inventory media portfolio with little risk.
As well as defining what inventory media is, it’s also worth defining what it isn’t. Inventory media is not, addressable, biddable, or programmatic media buys, which can be sold as disclosed buys. Nor is it free space, agency related purchase benefits or SLAs. These agency benefits are obtained on the back of client spends and they carry no risk, therefore they should not be repackaged and sold as inventory media.
Why is inventory media so attractive to media agencies?
Inventory media returns often outweigh agency remuneration and client commission. Assuming, conservatively, that inventory media margins are 25% or more, the profits delivered are significantly higher than returns from disclosed trading. This revenue opportunity helps to explain why inventory media is being pushed so strongly by agencies and the agency holding companies.
The benefits of inventory media to agencies
Because of the non-disclosed nature of inventory media – routinely sold with strict, no-audit clauses – agencies can retain Annual Volume Benefits (AVBs) or repurpose these entitlements to their own ends; unbilled media disappears. They can use improved pricing to meet their own performance objectives, and the lack of audit rights reduces accountability by shutting down the billing audit trail. By inserting themselves into the purchasing chain, agencies can exert more pressure on media owners and effectively control supply and demand at the same time.
Of course, future pandemics, wars, and global recessions can lead to significant losses by impacting agencies’ abilities to sell on inventory, but that is only a risk if inventory has actually been pre-purchased.
The benefits and disadvantages of inventory media to advertisers
On the client side, the promise of inventory media is that it can secure media cheaper than regular buys, as well as provide access to inventory not normally available direct. Less positively, inventory media comes with no transparency or audit rights. Opting into inventory media means that AVBs, unbilled, and other financial benefits are unavailable. Inventory media is opportunistic and can result in media buys that do not fit in with an over-riding media strategy.
The lack of audit rights over the underlying media owner invoices compromises the ability of advertisers to measure any price advantage secured in media planning.
And perhaps most importantly of all, there is a fundamental conflict of interest with the agency buying media on behalf of a client and selling media to the same client. Therefore, media neutrality is at risk.
Recommendations for making inventory media work for you.
If done well, inventory media can drive price reduction, therefore it may make sense to include an element it in your media mix. If you do choose to approve such media, make sure that your contract has a clear unambiguous definition of inventory media . If controlled well, it can indeed be worth giving up transparency and audit rights. It’s all about having the right checks and balances in place and managing the right level of volume into this media buy
- Approvals – You shouldn’t sign up to a general opt-in. Insist on line by line detail clearly identifying inventory on a media plan so that informed purchase decision and approval can be given. Even better implement an electronic signature approval process for your media plan and make sure this is codified in the contract. And remember: make sure inventory media fits your media strategy.
- Commercials – Set up a specific cap for inventory media, agreeing with your agency (these are market and client specific but most clients would do well to keep it) 10% or 20% of your total media spend can be allocated to inventory media. That gives you a strong commercial lever and ensures that rogue approvals cannot slip through, despite the lack of transparency and no-audit clauses. The agency should be required to report quarterly against such cap limits.
- Value – ensure that you receive a saving as a result of using inventory media. This should be clearly established up front by the agency showing the cost of a direct buy from a media vendor compared to the same media acquired from the agency as inventory media. Establish a minimum saving. Or alternatively you may also want to consider a profit share/rebate or potentially both.
- Define and stick to a mutual definition, approval, cap and rules of inventory media in your contract – If you take this approach, inventory media buys can be monitored, audited, and you can get compensation if contractual commitments are not met. This enables a much clearer verification of value delivery.
